biz orgs outline

7/23/2019 Biz Orgs Outline

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Biz Orgs Outline

In choosing a business organization, there are two primary considerations:1. Limited Liability:

Limited liability is a product of state law.

The owners of the business may want to limit their personal/individualexposure to liabilities of the business, so that if the business fails or there is acatastrophic liability associated with the business, the business will fail but theindividual’s personal assets will be protected.

2. Ta Treatment: Tax treatment is a federal income tax law.

There are two types of tax treatment:

• Flow Through Tax: the entity itself doesn't pay income tax; the income fows

through to its owners who in turn pay the income tax directly on theirindividual returns.

o ne level of tax.o !ertain entities have to be doubly taxed because they are public entities

• Double Taxation: the business entity, if it is showin" a pro#t, will pay anincome tax $corporate income tax% on its pro#t, and when those pro#ts aredistributed onto its owners $dividend%, the owners will pay a personalincome tax on those dividends, so the pro#ts are bein" doubly taxed.

Basic Legal !orms o" Business Organization

• #ole $roprietorship:

o The sole proprietorship is the simplest form of business or"ani&ation. There is no

state #lin".

o sole proprietorship results when a person has decided to run a business, butwithout incorporatin" the business or formin" it as an LL! or some other type ofentity.

o (n a sole proprietorship, there is no le"al distinction between the business and theowner $who, of course, is called the sole proprietor %. (t is almost always a wise idea for the sole proprietor to separate her personal

#nances from the business’s #nances, such as by havin" separate ban)accounts and accountin" records.

o There is both "ood news and bad news in the sole proprietorship.

The "ood news is that the business, not bein" a separate entity from theowner, does not pay taxes. (f the business "enerates taxable income, theowner must report this income on her personal tax return and pay taxes on it. The sole proprietor’s obli"ation to pay taxes based on the business’s incomehardly sounds li)e *"ood news.+



The bad news about the sole proprietorship is that the owner is personallyliable for all of the business’s debts and obli"ations. This is because there is nole"al separation between the sole proprietorship and the sole proprietor.



$artnership: ust have - memberso General Partnership: no speci#c #lin" that has to ta)e place with the state

$similar to sole proprietorship in the sense that - people can start a businesswithout #lin" to create one% nlimited liability and 0oint and several liability 1 if one partner is uncollectable,

the other partner may have to pay 2334 of the liability• 5artners pay taxes individually

Two or more partners who start a business without bein" re6uired to #le withthe state.

(n terms of liability, the "eneral rule is that partners in a partnership are 0ointlyand severally liable for the debts and obli"ations of the partnership. (t is worthpausin" here to consider how serious 0oint and several liability is fordefendants. (f defendants are 0ointly and severally liable for a claim, thecreditor may recover the full amount owed from any sin"le defendant.

o Limited Partnership (“LP”): limited liability for limited partners, who invest into

the entity 1 they are passive investors, and if there are bi" liabilities within thepartnership, the limited partners will lose their investment but they won’t have tobe individually liable. L5s are similar to "eneral partnerships in that they have 7ow8throu"h tax

treatment. 9ut in an L5 there are two dierent types of partners:• eneral 5artners, and

• Limited 5artners

Typically in an L5 there must be at least one general partner $or perhaps a few%and several limited partners. • The advanta"e of bein" a general partner is control:

o <xcept to the extent otherwise provided in the limited partnershipa"reement, the "eneral partner has full decision8ma)in" authority overthe L5.

• The disadvanta"e of bein" a general partner is liability:o uch li)e partners in a "eneral partnership, the "eneral partner in an L5

will be personally liable for the L5’s debts and obli"ations. n the otherhand, limited partners have no control over the L5 $except to the extentthe a"reement "rants them votin" ri"hts%, but will not be personallyliable for the L5’s debts and obli"ations except in unusual circumstances

• (n the real world, a partner itself can be another business entity, so whatends up happenin" is that the "eneral partner is an entity with limitedliability.o Limited 1 certain members won’t have to pay the business debt

o Limited Liability Partnership (“LLP”): very state speci#c =ome states allow for LL5 without a "eneral partner with unlimited liability



o Corporation: "enerally, corporation owners are shareholders, who have limited

liability. The "reat advanta"e of the corporate form is limited liability:

• =hareholders of a corporation aren’t personally liable for the corporation’ sdebts and obli"ations.

• Li)e partnerships, corporations have been around for centuries. nli)e apartnership, which has partners and perhaps employees, the *cast ofcharacters+ in a corporation is relatively crowded: there are shareholders;directors; and o>cers and otheremployees.

The shareholders arecalled the *owners+ of thecorporation but have

surprisin"ly little control over it in their shareholder role.• The shareholders annually elect the directors, who are "iven "eneral

authority to run the business. lthou"h the directors could ma)e nearlyevery business decision that the corporation must ma)e, typically it is moree>cient to dele"ate some decision8ma)in" power to o>cers $and otheremployees%.

o Limited Liability Company (“LLC!

LL! is the most popular entity Ta)es the limited liability of a corporation The LL! "ets 7ow8throu"h tax treatment LL!s are sometimes called the *best of both worlds+ because they combine the

desirable aspect of corporate status $limited liability for owners% with thedesirable aspect of partnership status $7ow8thou"h tax treatment%.

s a general rule, the owners of an LL! $called the members% will not bepersonally liable for the debts and obli"ations of the LL!.• (f the LL! #les ban)ruptcy, then the worst that will happen to a member is

that the value of her interest in the LL! will dwindle to &ero.• eanwhile, the LL! will be treated as a partnership for tax purposes if there

are multiple members, and treated as a *disre"arded entity+ if there is onlyone member.

•

(n other words, the LL! "ets 7ow8throu"h tax treatment.The LL% "orm is not sub&ect to the restrictions on # corporations under

the I'%.

#ources o" Law

#tate Lawo =tate in which or"ani&ation is formed "overns it *internal aairs.+

"nternal #$airs Doctrine: the state of the or"ani&ation of the entity will controlits internal aairs $how you or"ani&e your internal aairs depends on yourstate of or"ani&ation, even if you operate in a dierent state%.



enerally, the law of the state where the entity is formed will "overn theinternal a$airs of the entity, that is, the relations between the owners of theentity and the mana"ers of the entity.• %&: assume that a corporationis incorporated under ?elaware lawbut is

physically located in anddoes all of its business in Texas. ?elaware law willcontrol its*corporate "overnance,+ as well asany disputes between thecorporation’s shareholders, directors and o>cers. Thus, if the shareholderssue the directors claimin" that the directors breached the #duciary dutiesthat they owe to the corporation, then ?elaware law will apply in thatlawsuit. ne does not have to liti"ate the matter in a ?elaware court, butthe court in which the lawsuit is #led must apply ?elaware law to the case.

o The rules for how a business entity is "overned, and for resolvin" disputesbetween the business’s owners and its mana"ers, are found in the law where thebusiness is incorporated or or"ani&ed, not where it is physically located. any = corporations are or"ani&ed in ?elaware because it has the most

developed case law in business law, so it dominates with publicly tradedcompanies. %xternal a$airs are "overned by the state in which the company operates $@L,

not ?elaware%, because a third8party is involved.

Balance #heet ( Income #tatement:

• 'alance heet:

o =tatement of assets and liabilitieso 5urpose is to show the #nancial condition of a business as of the date of the

statement.o ssets A Liabilities B wner’s <6uity

o ssets B Liabilities wner’s <6uity

• "ncome tatement:

o =tatement coverin" a period of time.o 5urpose is to "ive a summary of earnin"s between balance sheet dates.

) and B $artnership %ompany Balance #heet

)ssets Liabilities ( *+uities

!ash CD,3335roperty C-,333(nventory C2,333

achinery C-,333C23,333

Eote CD,333

<6uities CD,333

C23,333

ssets C23,3331 Liabilities CD,333 <6uity CD,333

Liabilities CD,333 wner’s <6uity CD,333

ssets C23,333

Income #tatement !ollowing the !irst onth o" Business

#ales *penses $ro-t

CF,333 !ost of oods =oldC2,333

C2,333



eneral <xpenses C2,333 Total <xpenses C-,333

ew Balance #heet / 0iing *ect to the 31,444 $ro-t

)ssets Liabilities ( *+uities

!ash CG,333

5roperty C-,333(nventory C2,333achinery C-,333

C22,333

Liabilities CD,333

<6uities CG,333C22,333

• ssets $cash% have "one up by C2,333 because of the C2,333 pro#t

• Total assets have "one up to C22,333, liabilities have stayed the same, so owner’se6uity must "o up to CG,333 to balance the two sides.

%ompany Then Borrows 32,444)ssets Liabilities ( *+uities

!ash CH,3335roperty C-,333(nventory C2,333achinery C-,333

C2F,333

Eote CD,333 Eote C-,333

<6uities CG,333C2F,333

• 9orrowin" C-,333 increases our assets $cash% by C-,333

• Liabilities also "o up by C-,333 owner’s e6uity stays the same

) ( B 5ithdraw 31,444 *ach)ssets Liabilities ( *+uities

!ash CG,3335roperty C-,333(nventory C2,333achinery C-,333

C22,333

Eote CD,333 Eote C-,333

<6uities CI,333C22,333

• !ash "oes down to CG,333 liabilities are the same, so owner’s e6uity must decreaseby C-,333



)gency Law

• 'T) 6 1.41: )gency 7e-nedo "ency is the #duciary relation that arises when one person (principal! manifests

assent to another person (agent! that the a"ent shall act on the principal’s behalfand sub0ect to the principal’s control, and the a"ent manifests assent or otherwiseconsents so to act.

'T) 6 1.48: ani"estationo person mani)ests assent or intention throu"h written or spo)en words or other

conduct.

• 'T) 6 8.41: %reation o" )ctual )uthorityo ctual authority is created by a principal's manifestation to an a"ent that, as

reasonably understood by the a"ent, expresses the principal's assent that thea"ent ta)es action on the principal's behalf.

• 'T) 6 2.41: )ctual )uthority

o n a"ent acts with actual authority when, at the time of ta)in" action that hasle"al conse6uences for the principal, the a"ent reasonably believes, inaccordance with the principal’s manifestations to the a"ent, that the principalwishes the a"ent so to act.

• 'T) 6 2.42: #cope o" )ctual )uthorityo n a"ent has actual authority to ta)e action designated (expressed! or implied in

the principal's manifestations to the a"ent and acts necessary or incidental toachievin" the principal's ob0ectives, as the a"ent reasonably understands theprincipal's manifestations and ob0ectives when the a"ent determines how to act. Actual Express Authority: the literal words or actions of the "rant authority

by 5 to .• principal has expressly communicated to an a"ent the power to perform

some act on the principal’s behalf. Jowever the scope of an express "rantof authority may well be an issue. The ultimate test is whether a reasonableperson in the a"ent’s position would interpret the principal’s communicationto encompass a particular act.

Actual Implied Authority (incidental authority):

• cts usual and incidental to the act directly authori&ed, includin" actsreasonably necessary or enerally considered appropriate to

accomplish the a"ency.

• n agent has implied actual authority when the principal does not

expressly con)er authority but the principal*s words or conduct,“reasonably interpreted+ causes the agent to belie,e that he has authority.

• n a"ent's interpretation of the principal's manifestations is reasonable if itre7ects any meanin" )nown by the a"ent to be ascribed by the principaland, in the absence of any meanin" )nown to the a"ent, as a reasonableperson in the a"ent's position would interpret the manifestations in li"ht of



the context, includin" circumstances of which the a"ent has notice and thea"ent's #duciary duty to the principal.

• 'T) 6 8.42: %reation o" )pparent )uthorityo pparent authority is created by a person's manifestation that another has

authority to act with le"al conse6uences for the person who ma)es themanifestation, when a third party reasonably believes the actor to be authori&edand the belief is traceable to the manifestation. #pparent authority does not arise from the acts of the agent .

• 'T) 6 2.48: )pparent )uthorityo pparent authority is the power held by an a"ent or other actor to aect a

principal's le"al relations with third parties when a third party reasonably believes

the actor has authority to act on behalf of the principal and that belief is traceableto the principal's manifestations. The fact that one party performs a service that facilitates the other's business

does not constitute such a manifestation.• %x: 9y clearin" securities trades for another #rm, a securities bro)er does

not ma)e a manifestation to customers of the #rm sendin" the orders thatit acts with the authority of the clearin" #rm.

n a"ent has apparent authority in dealin" with a third person when the principal*s words or conduct, reasonably interpreted+ causes the third personto belie,e that the a"ent has authority.

n a"ent may have apparent authority to act even thou"h as between himselfand the principal, such authority has not been "ranted.

• 'T) 6 8.49: %apacity to )ct as a $rincipal

o n individual has capacity to act as principal in a relationship of a"ency if, at thetime the a"ent ta)es action, the individual would have capacity if actin" inperson.

o The law applicable to a person that is not an individual "overns whether theperson has capacity to be a principal in a relationship of a"ency as well as theeect of the person's lac) or loss of capacity on those who interact with it.

o (f performance of an act is not dele"able, its performance by an a"ent does notconstitute performance by the principal.

• 'T) 6 8.4: %apacity to )ct an )gento ny person may ordinarily be empowered to act so as to aect the le"al relations

of another. The actor's capacity "overns the extent to which, by so actin", theactor becomes sub0ect to duties and liabilities to the person whose le"al relationsare aected or to third parties.



)gency law inoles the relationship between at least two, but usuallythree, persons:o The principal , which is the person on whose behalf wor) or some tas) is bein"

done;o The aent , which is the person doin" the wor) or performin" the tas); ando The third party , which is the person with whom the a"ent deals on behalf of the

principal.

5hy do we need agency law;o Ke need a"ency law in order to have a le"al way to bind a principal with a third

party to an a"reement/contract. The principal may be a #ctitious entity thatcannot, on its own, si"n a contract.

5hat is the purpose o" a principal acting through an agent;o The principal wants the a"ent to act on its behalf to tie it to a bindin" contract.

Ke will have bindin" contracts between the principal and the third party aslon" as the a"ent acts with authority.

!or a binding contract:o "ent has authority

ctual, or pparent

o 5rincipal rati#es the act -atication: a"ent had no authority at the time that he entered into the act,

but principal later approves it $retroactive%.

There are "our ways to determine whether the principal is contractuallybound to the third party due to the agent<s actions:2. (f the a"ent acted with actual authority ;-. (f the a"ent acted with apparent authority ;F. (f a person is estopped from denyin" liability; and

OT O *=)

I. (f a person rati!es an unauthori&ed act.

#trictly spea>ing, only the -rst two categories inole a “true” aencyrelationship ?and een apparent authority may be held by a person who is

not an [email protected] (n other words, a * principal+ may be estopped from denyin" liability resultin" from

the acts of a person who was technically not her *agent .+

o =imilarly, a * principal+ may ratify the unauthori&ed actions of a non8a"ent $or anagent %, in which case the actions will be treated as if they had been authori&ed.

Problem "#$: our wealthy uncle recently died. (n his will, he established atestamentary trust for your bene#t and funded it with C2 million. The will directs thetrustee of the trust to prudently invest this money on your behalf, to use it to pay



your educational expenses and, when you have completed your education orreached the a"e of F3 $whichever occurs #rst%, distribute any remainin" amounts toyou. 9i" Eational 9an) was desi"nated as the trustee of this trust and has acceptedthis position. ou are currently in law school and are -I years old. "s 'ig /ational'an0 your agent1o This is a #duciary relationship, but the element of control is lac)in".o bene#ciary is not a principal 1 the bene#ciary has no control over the ban) as

an a"ento This is a trust relationship, not an a"ency relationship.

• Problem "#": Mohn is an adult who suers from mental delusions, which "reatlyworries his relatives. Mohn’s father, 9ill, petitioned the probate court to have a"uardian and conservator appointed for Mohn. The court appointed 9ill as Mohn’s"uardian and conservator. "s 'ill an agent )or 2ohn1o Eot an a"ency relationship.o This is a uardian N Kard relationship.o This is not a principal8a"ent relationship. The ward cannot be in control of the

"uardian.o

=o, not all #duciary relationships are a"ency relationships.

• Problem "#%: 9! !aterin" hired Messica as an o>ce mana"er. "s 2essica an agent)or #'C Catering1o es 1 an o>ce mana"er is an a"ent of the employee.

<mployment relationships are a subset of a"ency relationships. llemployment relationships are a"ency relationships but not all a"encyrelationships are employment relationships.

n employee has a #duciary responsibility to the employer. The employee, by a"reein" to wor) there, is a"reein" to be sub0ect to the

control of the company. This doesn’t mean that all employees have a lot of authority, but they are still

a"ents of the employer.

• Problem "#&: esterday, your roommate mentioned that she was "oin" to "o to thehardware store today. 9efore you left the apartment this mornin", you put a note anda C23 bill on the )itchen table. The note said: *se this money to buy me a "oodscrewdriver.+ fter she awo)e and read the note, your roommate too) the money andwent to the hardware store. "s your roommate your agent1 ") so+ )or what purpose1Does it matter that she is not being paid )or her actions1o es, by ta)in" the C23 the roommate is under the *control+ of the other

roommate.o The fact that she wasn't compensated does not ta)e away the a"ency relationshipit is "ratuitous.

o 9y ta)in" the note and the money, the a"ent has accepted to be sub0ect to theprincipal’s control.

• Problem "#': Mohann was plannin" to sell his car, but didn’t "et around to doin" sobefore he left for a vacation in the 9ahamas. 9efore he left, Mohann as)ed his friendOhonda if she would be willin" $for a C233 fee% to help him sell his car. Ohondanodded her head, and Mohann handed her the )eys to his car, tellin" her that sheshould ne"otiate the best price she could, but not less than CH,333. Khen Ohonda



went to pic) up the car from Mohann’s house, she discovered it was covered with mudand full of fast food wrappers and other "arba"e. Thus, Ohonda decided to ta)e thecar to the car wash, where she "ot the *super wash,+ which cost C2D. (nstead ofpayin" the C2D, Ohonda convinced the car wash to bill Mohann for it upon his returnfrom vacation. Ohonda also decided that the car would loo) nicer with 7ames paintedon its sides. Thus, Ohonda a"reed with Tom, the owner of Local uto ara"e and?etailin", that he would paint 7ames on the car, at a cost of C2,333. Ohonda "ave Tom a CD3 deposit and told him that Mohann would pay the rest of the bill. Tom

a"reed to paint the 7ames by the next wee). 3nder the theory o) actual authority+ is 2ohann obligated to pay )or the car wash1 "s he obligated to pay )or the paintedfames1 (") not+ what happens to the 456 deposit1!o "ency relationship created $manifestation is head nod, ta)in" )eys, etc.%o Mohann is the principal and Ohonda is the agent with respect to sellin" this car for

no less than CH,333.o Mohann is obli"ated to pay for the car wash because he impliedly authori&ed

Ohonda to clean ito #ctual express authority is to sell the car, but it’s implied that the car needs to be

made suitable for sale.o ddin" the 7ames to the car was not reasonably implied as necessary to achieve

Mohann’s "oal.o ssumin" there was no apparent authority, Mohann is not obli"ated to pay for the

7ames unless he later rati#es the act.

o Problem "#: aynard oneyba"s is a wealthy and successful businessman whohas a passion for collectin" historical artifacts. aynard was thus very excitedwhen he heard that =u&anne @ran)lin, the "reat8"reat8"reat8"reat "randdau"hterof 9en0amin @ran)lin, wanted to sell 9en’s famous )ite. Jowever, aynard did notwant to have his purchase reported in the news media. Thus, aynard contacteda famous museum director, 5am 5retentious, and as)ed her to approach =u&anneabout purchasin" the )ite on his behalf, but without revealin" his identity to=u&anne. Je told 5am that he would pay her CD,333 for her services, and that shecould pay any price up to C2 million for the )ite. 5am informed =u&anne that she

wanted to purchase the )ite on behalf of a *wealthy friend.+ fter somene"otiations, =u&anne a"reed to sell the )ite for CHPD,333. (n the meantime,however, aynard be"an to wonder whether he should be spendin" his money onhistorical artifacts. "s 7aynard obligated to purchase the 0ite )rom u8anne1 es. n a"ency relationship was created between aynard and 5am.

• Je had "iven her actual express authority to purchase the )ite for up to C2million.o (t doesn’t matter that =u&anne was not aware of aynard’s identity.



o Problem "#: ?oes your answer to 5roblem -8P chan"e if the purchase price hadbeen C2.2 million rather than CHPD,333Q es, because the actual express authority was to buy the )ite for no more than

C2 million. 5urchasin" the )ite for C2.2 million means 5am is actin" outside her express

authority.• There are no facts that indicate the presence of apparent authority.

o (f aynard does not rati)y the C2.2 million purchase, =u&anne cannotloo) to aynard to pay for the )ite. =u&anne’s only course of actionwould be a"ainst 5am.

o Problem "#*: ?oes your answer to 5roblem -8P chan"e if 5am had told =u&annethat she wanted to buy the )ite for herself rather than on behalf of a *wealthyfriend+Q Eo this would be an undisclosed principle, and assumin" that the purchase

price was under C2 million the purchase would be expressly authori&ed.

o Problem "#$+: Oecall Mohann and Ohonda from 5roblem -8G above. ssume that

Ohonda’s friend =amantha was present when Mohann as)ed Ohonda to help himsell his car and handed her the )eys. few days later, however, Mohann calledOhonda from the 9ahamas and told her that he had chan"ed his mind and thatshe should not sell the car. Eonetheless, when =amantha as)ed Ohonda later thatday whether the car was still for sale, Ohonda said yes. =amantha then oeredOhonda CH,333 for the car, and Ohonda accepted her oer. "s 2ohann obligated tosell the car to amantha1 ") so+ is -honda liable to 2ohann1 =ee =ection H.3R ofthe -estatement. Ohonda did not have actual authority to sell the car because Mohann revo)ed

the authority. There could be a case for apparent authority and that would bind Mohann to sell

the car to =amantha. (f Mohann must sell the car to =amantha, then Ohonda could be liable to Mohann

for breach of her #duciary duty. Eo. The identity of the principal does not have to be )nown to the third party in

order to enter into a bindin" contract. This would be an undisclosed principal.ssumin" the purchase price was CHPD,333, this would be expressly authori&edand would be bindin" on and =.• 9hy use an undisclosed principal1

o Oeal estate, if you’re tryin" to ac6uire several properties at one time anddon’t want people to hold out on sellin" their property because of anincrease in property values $say the purchaser was ?isney%

o Problem "#$$: 9! !aterers hired =am to wor) as an o>ce assistant, answerin"the telephone and performin" other clerical tas)s. ne day, while =am was aloneat the o>ce, a""ie wal)ed in and said that she needed a caterer for herweddin", which was to ta)e place two days later. $a""ie’s prior caterer hadsuddenly "one out of business.% =he then proceeded to explain to =am the veryelaborate menu that was needed. =am told a""ie that 9! !aterers would behappy to cater her weddin" and they each si"ned 9!’s *standard+ contract,



which =am retrieved from a drawer in his des). "s #'C Caterers obligated to cater7aggie*s wedding1 ssumin" =am had no actual authority, did he have the apparent authority to

do thisQ• =am was alone in the o>ce, the si"n on the door said 9! !aterin", =am

had access to the contracts 1 leads to reasonable belief that there wasapparent authority.o 9T, it was an elaborate menu, to be done two days later 1 was this the

)ind of thin" that 9! normally didQ !ould a""ie have reasonably believed that =am had the authority to enter

into this contractQ• This issue is more important than the #nal conclusion $can be ar"ued either

way%

o Problem "#$": Kould your answer chan"e if the owner of 9! !aterin" hadexplicitly forbidden =am from a"reein" to caterin" contracts, but a""ie didn't)now that1 Khat if a""ie )new thatQ pparent authority can be created without there bein" any actual authority, so

it doesn’t matter that =am had been forbidden. Khat matters is what a""iecould reasonably believe. (f )new that = had been forbidden, there is no apparent authority $if the third

party )nows the actor has no authority, he cannot reasonably believe thatthere was authority%

o Problem "#$,: (nternational !on"lomo (nc. $(!(% is a very lar"e, multi8nationalcorporation. The 5resident of (!(, Kendy Kilson, has ne"otiated for (!( to obtain aC- million loan from 9i" Eational 9an). 9i" Eational 9an) has a"reed to ma)e theloan. Does 9endy ha,e authority to sign the loan agreement on behal) o) "C"1 ") you were legal counsel to the ban0+ what would you do1 9ould your answer

change i) "C" were a ,ery small company1 5resident could have authority to do such a thin" in his 0ob description, in the

corporate bylaws.• (n corporate law, authority is "enerated from 9?, in bylaws, in contract,

etc. The ban) must as) for resolutions from the 9oard of ?irectors showin" that K

has actual authority to enter into this contract, because the ris) the ban) runsis assumin" that the 5resident has the authority to do somethin" that it doesnot have the power to do. Oelyin" on apparent authority can be problematic.• (f it’s a multi8national corporation, it mi"ht be reasonable to believe that the

corporation has the power to si"n a C-mil contract. 9ut if it were a smallercompany, there is no such reasonable expectation.

o Problem "#$%: =ection -.3F of the -estatement refers to apparent authority as a power held by an a"ent. (s there a dierence between a power and a right Q "ain,consider =ection H.3R of the -estatement . ower: our a"ent will be able to bind the principal without havin" the ri"ht to

do so, meanin" that if the a"ent has apparent authority, it has the power tobind the principal to the contract, but if it is not in ri"ht to do that, it hasbreached a #duciary duty to the principal



o Problem "#$&: !an an a"ent for an undisclosed principal have apparentauthorityQ n a"ent for an undisclosed principal cannot have apparent authority because

apparent authority depends on the principal’s manifestations to the third party.• (f the third party does not )now the principal exists, this is not possible.

o Problem "#$*: 5atty is the sole proprietor of 5atty’s Oestaurant. @or many years,lex was the purchasin" mana"er for the restaurant and routinely ordered food onbehalf of the restaurant from @ood Sendors, (nc. Typically, lex ordered aboutCD,333 of food from @ood Sendors each wee), usually on Kednesdays. ne Tuesday, 5atty and lex "ot into an ar"ument and 5atty #red lex. The followin"day, lex, who was very upset at bein" #red, called @ood Sendors, (nc. andordered CD,333 worth of food items. "s -" obligated to pay )or this )ood under thedoctrines o) apparent authority and;or estoppel1 Eo actual authority because lex has been #red. Khat about apparent authorityQ

• 5atty’s manifestations to @ood Sendors: they’ve been doin" this for yearsand it was never a problem.

• Eow, 5atty has, by her conduct, "iven @ood Sendors a reasonable belief thatlex has the authority to order food.

Jow can you have authority after the termination of the a"ency relationshipQ

• Oestatement says *a"ent or other actor,+ so a"ent authority can extendbeyond the termination of the a"ent relationship.

'ati-cation:

• -atication is the a>rmance of a prior act done by another, whereby the act is "iveneect as if done by an a"ent actin" with actual authority.o Oati#cation occurs after the fact.

• The ris) from the third party’s perspective is that the principal may not ratify.

• (n order to ratify, the principal must )now the material facts of the contract.o ust )now what they are ratifyin".

• ll or nothin" approach 1 must ratify the entire contract or none of it

• !an be done expressly or implicitly.

• person rati#es an act byo anifestin" assent that the act shall aect the person’s le"al relations, oro !onduct that 0usti#es a reasonable assumption that the person so consents.

I.32

• Problem "#"+: !asey !ounselor recently "raduated from law school and 0oined alar"e law #rm. round the same time, she bou"ht a house. 9ecause she had veryfew items of furniture and was too busy to buy more, !asey’s house was lar"elyempty, other than a futon, an old couch, a dresser, and a few tables and chairs.Unowin" of !asey’s situation, !asey’s mother, 9eth, decided to order some furniturefor her from the La&y =hopper catalo". 9eth convinced La&y =hopper that she was



actin" at !asey’s re6uest $which was not true%, and that they should deliver thefurniture to !asey *!..?.,+ meanin" that payment would be due upon delivery. @ourto six wee)s later, !asey was relaxin" on the old couch in her livin" room when thedoorbell ran". Two deliverymen were there with several cardboard boxes containin"furniture from La&y =hopper. "s Casey obligated to purchase this )urniture1 9hat)acts would she need to 0now be)ore she may rati)y this transaction1o Eo. There was no a"ency relationship.o The only way we could have a bindin" a"reement is if !asey rati#es it, which

would re6uire her )nowin" the material terms of the contract and payin" for thefurniture.

o =he can also send it bac), after which La&y =hopper would have to loo) to 9ethfor relief $9eth violated an implied warranty of authority%.

7isclosed, Anidenti-ed s. Andisclosed )gency

• -isclosed Principle:

o Khen the third party has notice the a"ent is actin" for a principal and has noticeof the principal’s identity.

o Liability of ?isclosed 5rincipal:

The "ent has actual or apparent authority. The 5rincipal is bound to Third 5arty The Third 5arty is bound to 5rincipal There is a contract between the 5rincipal and the Third 5arty, and the "ent is

not a party to the contract and cannot be held liable for anythin".• "ent is ET a party to the contract unless a"reed by third party and a"ent.

• .nidenti!ed Principle:

o Khen the third party has notice that the a"ent is actin" for a principal but doesn’thave notice of the principal’s identity.

o Liability of nidenti#ed 5rinciple: The a"ent has actual or apparent authority

• ore li)ely actual, because apparent authority is "iven by the principalwhich would be di>cult in this situation.

5rincipal is bound to third party. Third 5arty is bound to principal There is a contract between the 5rincipal and the Third 5arty.

• They can see) performance from each other.

• The a"ent is a party to the contract unless the a"ent and the third partya"ree otherwise.o 9ecause the third party should be able to loo) to the a"ent for

performance because they don’t )now who the principal is.

.ndisclosed Principle:o Khen an a"ent and a third party interacts, and the third party does not )now that

there is a principal at all; as far as the third party )nows, he is dealin" with thea"ent.

o Liability o) 3ndisclosed rincipal

The a"ent has actual authority.



• The "ent can’t have apparent authority because the third party is notaware of the existence of the principal.

The Third 5arty is in contract with both the 5rincipal and the "ent.

• The "ent has to be on the hoo) because, as far as the Third 5arty isconcerned, that is the person they’re dealin" with.

The 5rincipal is bound to the Third 5arty who 0usti#ably detrimentally relied andthe 5rincipal didn’t ta)e reasonable steps to notify.

o %xceptions:

isrepresentation of the lac) of a"ency.

• The a"ent misrepresents the lac) of a"ency $sayin" there is no a"ency 1armatie misstatement%, and where the principal and the a"entreasonably )now that the third party would not have dealt with the principalhad the principal )nown

• $roblem 2C21: rs. Jat#eld is )nown far and wide as ma)in" the best weddin"ca)es east of the ississippi Oiver. Mulia c!oy wanted to order one of rs. Jat#eld’s

ca)es for her upcomin" weddin" but )new that, if she were to wal) into rs.Jat#eld’s shop she would be turned away, due to a lon"standin" feud between theJat#eld and c!oy families. (nstead, Mulia as)ed her friend Kendy ullins to order aca)e from rs. Jat#eld for delivery in two wee)s, specifyin" the type of ca)e thatshe wanted. Kendy went to rs. Jat#eld’s shop and ordered the ca)e and rs.Jat#eld a"reed to prepare and deliver the ca)e to the address that Kendy "ave her.Khen as)ed by rs. Jat#eld, Kendy stated that the ca)e was for her own weddin".") 7rs. <ateld disco,ers that the ca0e is really )or 2ulia*s wedding+ may she re)use to per)orm the contract1 9hat i) she nds out a)ter the ca0e has been deli,ered (andeaten!1o ndisclosed 5rincipal $rs. Jat#eld thou"ht she was dealin" with Kendy $throu"h

an a>rmative act%.o Kendy had actual authority to order the ca)e $she was expressly told to do so%o !ontract between the principal and the third party and between the third party

and the a"ent De)ense: isrepresentation

o Mulia and Kendy had reason to believe that rs. Jat#eld would not have made theca)e for Mulia due to the lon"standin" feud

o The third party can raise the defense of misrepresentation and avoid the contracto (f she #nds out after the ca)e has been delivered and eaten, it’s too late to do

anythin" about it

• $roblem 2C22: Kould your answer to 5roblem -8-2 chan"e if Kendy had insteadstated that she was orderin" the ca)e for *a friend’s weddin"+Qo nidenti#ed 5rincipalo Eo misrepresentation because there has not been a misstatemento Eo defense on behalf of rs. Jat#eld.

• $roblem 2C28: Oecall aynard oneyba"s, =u&anne @ran)lin, and 5am 5retentiousfrom 5roblem -8P. ssume that 5am had explained to =u&anne that she was actin"on aynard’s behalf and that =u&anne a"reed to sell the famous )ite to aynard for



CHPD,333. Jowever, althou"h the )ite was delivered to him, aynard never paid thepurchase price and has now disappeared, ta)in" the )ite with him. 7ay u8annereco,er the purchase price )rom am1o ?isclosed 5rincipalo Eo contractual relationship between 5am and =u&anne because =u&anne )new

who the principal was and 5am had actual authority to buy the )iteo The contract exists simply between the principal $% and the third party $=%; the

a"ent $5% cannot be held liable

• $roblem 2C29: Kould your answer to roblem =>=? chan"e if 5am had not told=u&anne that she was actin" on aynard’s behalf, but had only told her that she wasactin" on behalf of a *wealthy friend+Qo es because you have an unidentied principle. o The a"ent and the third party are parties to the contract, so the third party can

recover from the a"ent.

• $roblem 2C2: Kould your answer to 5roblem -8-F chan"e if 5am had simply told=u&anne that she was buyin" the )ite for her own personal collectionQ

o Eope, we have a contract between the "ent and the third party so we have anundisclosed principle. ndisclosed 5rincipal 1 there exists a relationship between the a"ent and the

third party, so the third party can recover from the a"ent• $roblem 2C2D: (f there are dierent results in the prior three problems, what is the

policy reason for these dierencesQ (f you were actin" as an a"ent, what stepsshould you or would you ta)e to minimi&e your chances of bein" held liable on thecontractQo (n the case of the disclosed principal, the third party has all the relevant facts and

can 0ud"e the credibility of the principal in decidin" whether to enter into acontract. (n the case of unidenti#ed or undisclosed principals, the third party does

not have all the facts and cannot 0ud"e the credibility of the principal.

Implied 5arranty o" )uthority

• person who purports to ma)e a contract, representation, or conveyance to or witha third party on behalf of another person, lac)in" power to bind that person, "ives animplied warranty of authority to the third party and is sub0ect to liability to the thirdparty for dama"es for loss caused by breach of that warranty, includin" loss of thebene#t expected from performance by the principal, unlesso The principal or purported principal rati#es the act as stated in I.32; oro The person who purports to ma)e the contract, representation, or conveyance

"ives notice to the third party that no warranty of authority is "iven; oro The third party )nows that the person who purports to ma)e the contract,

representation, or conveyance acts without actual authority.

• =ituation where a"ent or other actor states that he is actin" on behalf of a principal,but it turns out that there is no actual or apparent authority

• =<E< has to be on the hoo). purported a"ent who represents to another partythat he is wor)in" on behalf of another; he is "ivin" the sense of havin" authority. (fthat authority does not actually exist, the a"ent would be responsible for breach ofthat warranty and any dama"es it may cause to the third party.



o nless the principal later on rati#es it, or the other - examples

• $roblem 2C2E: Oecall !asey !ounselor and her mother, 9eth, from 5roblem -8-3above. ssume that !asey decides to re0ect the furniture and send it bac) to La&y=hopper. 7ay La8y hopper reco,er any damages )rom 'eth1o es, because someone has to be on the hoo). 9eth, by orderin" on !asey’s behalf,

had made a warranty that she had implied authority to act on !asey’s behalf. breach of that warranty means 9eth is responsible for loss or dama"es to the thirdparty.



$artnership Law

• 'A$) 6 141?D@: $artnershipo n association of two or more persons to carry on as co8owners a business for

pro#t formed under O5 -3-, predecessor law, or comparable law of another 0urisdiction.

• 'A$) 6 141?14@: $erson o n individual, corporation, business trust, estate, trust, partnership, association,

0oint venture, "overnment, "overnmental subdivision, a"ency, or instrumentality,or any other le"al or commercial entity.

• $artnershipso =ometimes called a de)ault form of business because it isn’t necessary to ta)e

any formal steps to form a partnership. ll that is re6uired is that the business meets the statutory re6uirements of a

partnership. artnerships do not need to #le any documentation with the state to form a

partnership. artnerships may be formed inadvertently when two people decide to

associate for a pro#t8ma)in" venture.

5hat types o" business entities are not partnerships;o 9usiness associations or"ani&ed under other statutes are not partnerships.

Those statutory associations include corporations+ limited partnerships+ and

LLCs.• Oelationships that are called @oint ,entures are partnerships if they

otherwise #t the de#nition of a partnership.• n association is not classi#ed as a partnership, simply because it is called a

@oint ,enture.• n unincorporated nonpro#t or"ani&ation is not a partnership under O5,

even if it 6uali#es as a business, because it is not a *for pro#t+ or"ani&ation.

o /.PA 0 "+"(b): 1ormation o2 Partnership n association formed under a statute other than this ct, a predecessor

statute, or a comparable statute of another 0urisdiction is not a partnershipunder this act.

• Problem ,#$: ay 9! !orp. and ?<@ !orp. form a partnershipQ

o es 1 two persons creatin" an association for pro#t $two corporations can form apartnership%

• Problem ,#": (f mir, 9ob, and !atrina form a partnership but later decide toincorporate their business, will the business be both a corporation and a partnershipQo Eo 1 an entity cannot simultaneously be a corporation and a partnership

!ormation o" a $artnershipo "s it possible that two (or more! people can )orm a partnership without intending

to do so1 (roblem ?>?!.



Kithout sub0ectively intendin" to do so

o 9ho would argue that a partnership has been )ormed when the partners did not

intend to do so1 $J(ET: nder O5 F3G, partners are @ointly and se,erally liablefor the debts of the partnership%. es 1 Khy would anyone want to ar"ue that a partnership exists if the parties

did not sub0ectively believe they were creatin" a partnershipQ 5artners are 0ointly and severally liable for each other’s debt. @rom the creditor’sperspective, it means they can collect 2334 of what they are owed from 0ustone of the partners. =o, a creditor mi"ht ar"ue that a partnership has beenformed. (t may have transacted business with one of the purported parties whois now "one or insolvent, so it wants to collect from someone who was apartner with that person.

In determining whether a partnership is "ormed, the "ollowing rules apply:o /.PA 0"+"(c)($): 3oint o4nership by itsel2 does not create a presumption

that a partnership exists Moint tenancy, tenancy in common, tenancy by the entireties, 0oint property,

common property, or part ownership does not by itself establish a partnership,even if the co8owners share pro#ts made by the use of the property.

o /.PA 0"+"(c)("): 5harin o2 ross returns does not create a presumption

that a partnership exists The sharin" of "ross returns does not by itself establish a partnership, even if

the persons sharin" them have a 0oint or common ri"ht or interest in propertyfrom which the returns are derived.• ross Oeturns 1 <xpenses B 5ro#ts

o /.PA 0"+"(c)(,): Pro!t sharin creates a presumption that a partnership

exists person who receives a share of the pro#ts of a business is presumed to be a

partner in the business, unless the pro#ts were received in payment:• f a debt by installments or otherwise;

• @or services as an independent contractor or of wa"es or othercompensation to an employee;

• f rent;

• f an annuity or other retirement or health bene#t to a bene#ciary,representative, or desi"nee of a deceased or retired partner;

• f interest or other char"e on a loan, even if the amount of payment varies

with the pro#ts of the business, includin" a direct or indirect present orfuture ownership of the collateral, or ri"hts to income, proceeds, or increasein value derived from the collateral; or

• @or the sale of the "oodwill of a business or other property by installmentsor otherwise.



7e"ault s. andatory 'ules

• /.PA 0$+,(a): <xcept as otherwise provided in -3# AB6?(b!, relations amon" thepartners and between the partners and the partnership are "overned by thepartnership a"reement. To the extent the partnership a"reement does not otherwiseprovide, -3# "overns relations amon" the partners and between the partners and

the partnership.

/.PA 0$+,(b): 6he partnership areement may not 2. Sary the ri"hts and duties under 23D except to eliminate the duty to provide

copies of statements to all of the partners;-. nreasonably restrict the ri"ht of access to boo)s and records under I3F$b%;F. <liminate the duty of loyalty under I3I$b% or G3F$b%$F%, but:

a% The partnership a"reement may identify speci#c types or cate"ories ofactivities that do not violate the duty of loyalty, if not manifestly unreasonable;or

b% ll of the partners or a number or percenta"e speci#ed in the partnershipa"reement may authori&e or ratify, after full disclosure of all material facts, aspeci#c act or transaction that otherwise would violate the duty of loyalty;

I. nreasonably reduce the duty of care under I3I$c% or G3F$b%$F%;D. <liminate the obli"ation of "ood faith and fair dealin" under I3I$d%, but the

partnership a"reement may prescribe the standards by which the performance ofthe obli"ation is to be measured, if the standards are not manifestlyunreasonable;

G. Sary the power to dissociate as a partner under G3-$a%, except to re6uire thenotice under G32$2% to be in writin";

P. Sary the ri"ht of a court to expel a partner in the events speci#ed in G32$D%;

H. Sary the re6uirement to wind up the partnership business in cases speci#ed inH32$I%, $D%, or $G%;R. Sary the law applicable to a limited liability partnership under 23G$b%; or23. Oestrict ri"hts of third parties under -3#.

• -e2ault: (f you have a partnership, the partners may not have a"reed on anythin"re: how they’re "oin" to "overn their business; in any instance in which they havenot a"reed on a certain matter, the O5 will #ll in the "aps and will be thepartnership a"reement. (f the partners don’t li)e what the default rules say, theyneed to create an explicit partnership a"reement

• ?efault rules are rules that are "oin" to apply "enerally to the partners, internally

• The partners as between themselves may "enerally a"ree to do whatever they want,but there are some restrictions

• The relationship of the partners with third parties will have E?TO rules 1 thethird parties’ ri"hts cannot be aected

/.PA 0 $+: Partnership 5ub7ect to Amendment or /epeal o2 Act o partnership a"reement does not necessarily have to be in writin".



(t can be express, implied, written, or verbal. The way we’ve done thin"s forever.

Ownership o" $roperty By a $artnership

• 0eneral 'ule:o 5roperty ac6uired by a partnership is property of the partnership and not of the

partners individually.

o 5roperty belon"s to a partner if it is ac6uired in his name without an indication ofthe person’s status as a partner or an intent to be used for the partnership$rebuttable presumption% even if the property is ultimately used for partnershippurposes.

Ander the 'A$), is a partnership an entity separate "rom its owners; ay

a partnership hold title to property in its own name;o /.PA 0 "+$: Partnership as Entity

partnership is an entity distinct from its partners. limited liability partnership continues to be the same entity that existed

before the #lin" of a statement of 6uali#cation under =ection 2332.

o /.PA 0 "+,: Partnership Property

5roperty ac6uired by a partnership is property of the partnership and not of thepartners individually.

o /.PA 0"+%8 9hen Property Is Partnership Property

a% 5roperty is partnership property if ac6uired in the name of:2% The partnership; or-% ne or more partners with an indication in the instrument transferrin"

title to the property of the person's capacity as a partner or of theexistence of a partnership but without an indication of the name of thepartnership.

b% 5roperty is ac6uired in the name of the partnership by a transfer to:2% The partnership in its name; or-% ne or more partners in their capacity as partners in the partnership, if

the name of the partnership is indicated in the instrument transferrin"title to the property.

c% 5roperty is presumed to be partnership property if purchased with partnershipassets, even if not ac6uired in the name of the partnership or of one or morepartners with an indication in the instrument transferrin" title to the propertyof the person's capacity as a partner or of the existence of a partnership.

d% 5roperty ac6uired in the name of one or more of the partners, without anindication in the instrument transferrin" title to the property of the person'scapacity as a partner or of the existence of a partnership and without use ofpartnership assets, is presumed to be separate property, even if used forpartnership purposes.



5ho 7ecides 5hat the $artnership 5ill 7o;

5hat does the partnership agreement say about the management rights o"the partners;o 7anagement -ights: each partner has e6ual ri"hts in the mana"ement and

conduct of the partnership.

In the absence o" an agreement ?de"ault rule@:o Do partners each ha,e an eual right to manage the partnership1

'A$) 6 941?"@: <ach partner has e6ual ri"hts in the mana"ement and conductof the partnership business.

o Jow do partners vote on ordinary matter concernin" partnership businessQ Khatvote is necessary to pass an ordinary measureQ ee O5 I32$0%. artnership 'usiness: ma0ority vote is re6uired to decide a dierence arisin"

as to a matter in the ordinary course of business of a partnership.• ne partner B ne vote, re"ardless of the amount of capital contributed.

o Jow do partners vote of matters outside the ordinary course of businessQ Khatvote is necessary to pass such a measureQ ee O5 I32$0%. The consent of all partners is re6uired to settle a dispute arisin" outside the

ordinary course of business. $nanimous Sote% doptin" the partnership a"reement in the #rst place re6uires a unanimous

vote.

)uthority o" $artners

)re partner<s agents o" the partnership; #ee 'A$) 6 [email protected] es, partners are a"ents of the partnership.

7o partners hae apparent authority to bind the partnership in theordinary course o" business; 5ee 'A$) 6 [email protected] 5artners also have apparent authorityo 9y admittin" or promotin" someone as partner, you are "ivin" the outside world a

reasonable belief that the person is authori&ed to act on behalf of the partnershipin the ordinary course of business

7oes a partner hae the authority to bind the partnership to a transactionoutside the ordinary course o" business; I" so, under what circumstances;5ee 'A$) 6 841?2@.



o This is a mandatory rule because it aects third parties.

Is 'A$) 6 841 a de"ault or mandatory rule; 5ee 'A$) 6 148?b@?14@.

o n act of a partner which is not apparently for carryin" on in the ordinary courseof business binds the partnership only if the act was authori&ed by other partners.

o Eo apparent authority outside the ordinary course of business 1 there must beactual authority.

!iduciary 7uties o" $artners

Partners o4e a duty o2 loyalty and duty o2 care to the partnership and the

other partners8 5ee /.PA 0 %+%(a)8o ?uty of loyalty: a duty to account to the partnership and hold as trustee for it any

property, pro#t, or bene#t derived by the partner in the conduct and windin" up of the partnership businessV

o duty to refrain from con7icts of interestso duty to refrain from competin" with the partnership’s business

9hat is a partners duty o2 loyalty; 5ee /.PA 0 %+%(b)8o The partnership a"reement may create exceptions

o partner's duty of loyalty to the partnership and the other partners is limited to

the followin": To account to the partnership and hold as trustee for it any property, pro#t, or

bene#t derived by the partner in the conduct and windin" up of thepartnership business or derived from a use by the partner of partnershipproperty, includin" the appropriation of a partnership opportunity;

To refrain from dealin" with the partnership in the conduct or windin" up of thepartnership business as or on behalf of a party havin" an interest adverse tothe partnership; and

To refrain from competin" with the partnership in the conduct of thepartnership business before the dissolution of the partnership.

9hat is a partners duty o2 care; 5ee /.PA 0 %+%(c)8o Duty o) Care: refrainin" from en"a"in" in "rossly ne"li"ent or rec)less conduct,

intentional misconduct, or a )nowin" violation of law.o Low standard, can be hei"htened $but not lowered%

o partner's duty of care to the partnership and the other partners in the conductand windin" up of the partnership business is limited to refrainin" from en"a"in"in "rossly ne"li"ent or rec)less conduct, intentional misconduct, or a )nowin"violation of law.



5ho is Liable "or 5hat to 5hom;

<ay a partnership sue or be sued in its o4n name; 5ee /.PA 0 ,+8o partnership may sue and be sued in the name of the partnership.

.nder 4hat circumstance is the partnership liable 2or any loss or 4ron2ulact o2 a partner; 5ee /.PA 0 ,+&(a)8o partnership is liable for loss or in0ury caused to a person, or for a penalty

incurred, as a result of a wron"ful act or omission, or other actionable conduct, ofa partner actin" in the ordinary course of business of the partnership or withauthority of the partnership.

Are partners personally liable 2or liabilities o2 the partnership; 5ee /.PA 0,+'(a)8o ll partners are liable &ointly and seerally for all obli"ations of the partnership,

unless otherwise a"reed by the claimant or provided by lawo E L((T<? L(9(L(T

9hat does 7oint and se=eral liability mean;

o Moint and several liability: 5artner , 9, and ! are 0ointly and severally liable fordebt to creditor. !reditor $third party% can choose to "o after 5artner alone tocollect. would have to pay 2334, re"ardless of how , 9, and ! had a"reed toshare their losses. can then see) indemni#cation/contribution from 9 and !

Liability o" *n"orcing Fudgments

I2 a creditor ets a 7udment aainst the partnership> is such 7udment

automatically en2orceable aainst the partners;o Eo, a 0ud"ment a"ainst a partnership is not by itself a 0ud"ment a"ainst a partner.

0ud"ment a"ainst a partnership may not be satis#ed from a partner’s assetsunless there is also a 0ud"ment a"ainst the partner.

=o, the partners need to be named in the lawsuit alon" with the partnership

o /.PA 0 ,+(c): 0ud"ment a"ainst a partnership is not by itself a 0ud"menta"ainst a partner. 0ud"ment a"ainst a partnership may not be satis#ed from apartner's assets unless there is also a 0ud"ment a"ainst the partner.

<ay a creditor satis2y a 7udment 2rom a partner 4ithout !rst exhaustinthe partnerships assets; 9hat i2 the partner 4as the tort2easor;o ou are always able to sue a sin"le partner as the tortfeasor. The creditor must

#rst exhaust the partnerships assets then the creditor can "o after the tortfeasorunder MN= Liability.

o /.PA 0 ,+(d): 0ud"ment creditor of a partner may not levy execution a"ainstthe assets of the partner to satisfy a 0ud"ment based on a claim a"ainst thepartnership unless the partner is personally liable for the claim under =ection F3Gand:2% 0ud"ment based on the same claim has been obtained a"ainst the

partnership and a writ of execution on the 0ud"ment has been returnedunsatis#ed in whole or in part;

-% The partnership is a debtor in ban)ruptcy;F% The partner has a"reed that the creditor need not exhaust partnership assets;



I% court "rants permission to the 0ud"ment creditor to levy execution a"ainstthe assets of a partner based on a #ndin" that partnership assets sub0ect toexecution are clearly insu>cient to satisfy the 0ud"ment, that exhaustion ofpartnership assets is excessively burdensome, or that the "rant of permissionis an appropriate exercise of the court's e6uitable powers; or

D% Liability is imposed on the partner by law or contract independent of theexistence of the partnership.

Indemni-cationG%ontribution <ay partners aree to share their losses in any 4ay they 4ish; I2 so> is

their areement bindin on third party creditors; 5ee /.PA 0 %+$(?)8o Eo. This section does not aect the obli"ations of a partnership to other persons

under F32

I2 a partner pays more than his share o2 partnership debt> does he ha=eany recourse; 1rom the partnership; 1rom the other partners;o -3# A 6B(b!: <ach partner is entitled to an e6ual share of the partnership pro#ts

and is char"eable with a share of the partnership losses in proportion to the

partner's share of the pro#ts.o -3# A 6B(c!: partnership shall reimburse a partner for payments made and

indemnify a partner for liabilities incurred by the partner in the ordinary course ofthe business of the partnership or for the preservation of its business or property.



• *haustion 'ule: 0ud"ment creditor has to "o after the assets of the partnershipunless the partner was personally liable $ex: was the tortfeasor%o The exhaustion rule applies only if they’re not individually liable or have co8

si"ned on a contract to be liable.

o Indemni!cation: whatever partnership a"reement says aects internally but itcan’t alter the ri"hts of a third party.

o Contribution: (f the partner pays more than his share of the debts they maysee) contributions from other partners.

Liability o" ew $artners

Is a ne4 partner liable 2or pre#existin partnership liabilities;o 'A$) 6 84D?b@: person admitted as a partner into an existin" partnership is

not personally liable for any partnership obli"ation incurred before the person'sadmission as a partner

9hat about the ne4 partners capital contribution; Could the ne4 partner

lose his or her capital contribution to a pre#existin debt; o The new partner’s capital contribution could be used/they can lose it and it is

owned by the partnership $can be used to pay o old obli"ations if the partnershipchooses%.

o Loo) to where the debt was incurred not owed.

How do the $artners a>e oney;

As a de2ault rule> is a partner entitled to a salary 2rom the partnership8

o 'A$) 6 941?h@: partner is not entitled to remuneration for services performedfor the partnership, except for reasonable compensation for services rendered inwindin" up the business of the partnership.

As a de2ault rule> ho4 do partners share pro!ts and losses; -oes it matterho4 much capital a partner has contributed to the partnership;o 'A$) 6 941?b@: <ach partner is entitled to an e6ual share of the partnership

pro#ts and is char"eable with a share of the partnership losses in proportion tothe partner's share of the pro#ts.

Partners ma?e money in a three#step process:

o 5artnership "enerates a pro#t;o 5ro#t is allocated to a partner’s capital account $pro#t share determined by

partnership a"reement; otherwise e6ual share by default%;o 5artnership ma)es distributions to partners $note that the partnership is not

re6uired to immediately distribute pro#ts to partners, unless the partnershipa"reement says so%.



#ale o" Ownership Interest to a Third $arty

-oes a partner ha=e an interest in the partnerships assets; I2 not> 4hatinterest does a partner ha=e; Is it personal property; 9hat i2 the partnership only o4ns real estate;o 'A$) 641: $artner ot %oCowner o" $artnership $roperty

partner is not a co8owner of partnership property and has no interest inpartnership property, which can be transferred, either voluntarily orinvoluntarily.

o 'A$) 642: $artners Trans"erable Interest in $artnership The only transferable interest of a partner in the partnership is the partner's

share of the pro#ts and losses of the partnership and the partner's ri"ht toreceive distributions. The interest is personal property.

<ay a partner trans2er his or her partnership interest to a third party;

o Eo, not unless the partners a"ree to it.

I2 so> does that entitle the trans2eree to be partner; 5ee /.PA 0 &+,8

o The transferee does not become a partner. Je does not have #duciary duties.

)ssignment o" $artnership Interest

9hat interest does the assinee ha=e;

o 'A$) 6 48?b@: transferee of a partner's transferable interest in thepartnership has a ri"ht:2. To receive, in accordance with the transfer, distributions to which the

transferor would otherwise be entitled;

-. To receive upon the dissolution and windin" up of the partnership business, inaccordance with the transfer, the net amount otherwise distributable to thetransferor; and

F. To see) under =ection H32$G% a 0udicial determination that it is e6uitable towind up the partnership business.

9hat is the status o2 the trans2eror partner; -oes he or she remain a partner in the partnership;o 'A$) 6 48?d@: pon transfer, the transferor retains the ri"hts and duties of a

partner other than the interest in distributions transferred.



%reditor o" a $artner

Is a 7udment creditor o2 a partner permitted to attach or le=y aainst the partnerships property;o 'A$) 6 41: $artner ot %oCowner o" $artnership $roperty

partner is not a co8owner of partnership property and has no interest inpartnership property, which can be transferred, either voluntarily orinvoluntarily.

9hat happens i2 a creditor o2 a partner see?s to le=y aainst the partners partnership interest;o 'A$) 6 49: $artners Trans"erable Interest #ub&ect to %harging Order

/.PA 0&+%(a): n application by a 0ud"ment creditor of a partner or of apartner's transferee, a court havin" 0urisdiction may char"e the transferableinterest of the 0ud"ment debtor to satisfy the 0ud"ment. The court may appointa receiver of the share of the distributions due or to become due to the 0ud"ment debtor in respect of the partnership and ma)e all other orders,directions, accounts, and in6uiries the 0ud"ment debtor mi"ht have made orwhich the circumstances of the case may re6uire.

/.PA 0&+%(b): char"in" order constitutes a lien on the 0ud"ment debtor'stransferable interest in the partnership. The court may order a foreclosure ofthe interest sub0ect to the char"in" order at any time. The purchaser at the

foreclosure sale has the ri"hts of a transferee.

/.PA 0&+%(c): t any time before foreclosure, an interest char"ed may beredeemed:• 9y the 0ud"ment debtor;

• Kith property other than partnership property, by one or more of the otherpartners; or

• Kith partnership property, by one or more of the other partners with theconsent of all of the partners whose interests are not so char"ed.

/.PA 0&+%(d): This act does not deprive a partner of a ri"ht under exemptionlaws with respect to the partner's interest in the partnership.

/.PA 0&+%(e): This section provides the exclusive remedy by which a 0ud"ment creditor of a partner or partner's transferee may satisfy a 0ud"mentout of the 0ud"ment debtor's transferable interest in the partnership.

Can the 7udment creditor sei@e the partners partnership interest andbecome a partner in the debtor partners place;o o, the creditor can get a charging order.



o 'A$) 649?e@: This section provides the exclusive remedy by which a 0ud"mentcreditor of a partner or partner's transferee may satisfy a 0ud"ment out of the 0ud"ment debtor's transferable interest in the partnership.

5ithdrawal o" a $artner

• -issociation o2 a Partner: Leavin" of a partner from the partnership.

• -issolution o2 a Partner: The whole partnership "oin" away.

•

9indin up: =ellin" all of the partnership’s assets, etc.

6ermination o2 a partnership: lso )nown as li6uidation, after windin" up occurs.

7issociation

9hat e=ents cause dissociation; 5ee /.PA 0 '+$8

o 5artner’s express will to withdraw !an’t be prevented from leavin" the partnership O5 23F$b% i"ht be wron"ful dissociation, but they !E 6uit.

o <vent a"reed to in the partnership a"reement as causin" dissociationo 5artner’s expulsion pursuant to the partnership a"reement.o 5artner’s expulsion by unanimous vote of the other partnerso 5artner’s expulsion by 0udicial determinationo 5artner becomin" a debtor in ban)ruptcyo The partner’s deatho Termination of a partner ET an individual, partnership, corporation, trust or

estate.o 9uy out the partner who leaves. ou’d have to evaluate their share.

%an the partnership agreement prohibit a partner "rom dissociating; #eeo 'A$) 6 148?b@?D@: Sary the power to dissociate as a partner under =ection

G3-$a%, except to re6uire the notice under =ection G32$2% to be in writin".

In other 4ords> does a partner al4ays ha=e the po4er to dissociate;

o 'A$) 6 D42?a@: partner has the power to dissociate at any time, ri"htfully orwron"fully, by express will pursuant to =ection G32$2%.

-oes a partner al4ays ha=e the riht to dissociate;

o partnership a"reement cannot prohibit a partner from dissociatin" $but canre6uire it to be in writin"%. partner will always have the power to dissociate, butmay not have the ri"ht to do so.



(t could be a breach of !ontract

o There are ne"ative conse6uences associated with a wron"ful dissociation.

5rong"ul 7issociation

-oes a partner al4ays ha=e the riht to dissociate;

o The partnership a"reement cannot prohibit a partner from dissociatin". ou canre6uire them to do so in writin", but the partner will always have the power todissociate. Jowever, the partners may not have a ri"ht to dissociate. This is calledwron"ful dissociation and there are conse6uences for wron"ful dissociation.

9hen is a partners dissociation 4ron2ul;

o 'A$) 6D42?a@: partner has the power to dissociate at any time, ri"htfully orwron"fully, by express will pursuant to =ection G32$2%.

Are there any neati=e conseuences to a 4ron2ully dissociatin partner;

o 9reachin" a contract provision and you’re liable for dama"es that caused as a

result of the breach (f partnership "oes into dissolution, the wron"fully dissociatedpartner has no ri"ht to participate in the windin" up of the partnership (fpartnership is not dissolved, there is a buy out of the dissociated partner but thebuy is o set by dama"es and if it was for a de#nite term or underta)in" the buyout will not occur until the term or underta)in" has expired unless you can showthat the payment would not cause an undue hardship to the partnership.

)rticle J 7issolution

-oes a partners dissociation al4ays result in dissolution; 5ee /.PA 0'+,(a)8o (f a partner's dissociation results in a dissolution and windin" up of the

partnership business, rticle H applies; otherwise, rticle P applies.

9hat e=ents cause dissolution; 5ee /.PA 0 +$8

o (n the case of an at8will partnership, the express will of any partner to dissolve$so, it’s not a "ood idea to have an at8will partnership%.

o (n the case of a partnership with a de#nite term or underta)in", the dissolutioncan happen if: There is the express will $vote% of at least half the remainin" partners to

dissolve within R3 days of the partner’s dissociation.



pon the express will of all the partners. t the expiration of the term or underta)in" or nder a 0udicial order to dissolve

)rticle E Buyout

9hat happens i2 a partner dissociates> but the partnership does notdissol=e; 5ee /.PA 0 +$(a)8o The buyout price is the "reater of li6uidation value or the value based on a sale of

the entire business as a "oin" concern with the dissociated partner and thepartnership were wound up as of that date

I2 a partner is bouht out> ho4 is the buy out price set; 5ee /.PA 0 +$(b)8o oin" !oncern: the partnership is of value, but has no value in terms of hard

assets 1 their value is in their reputation

Can the dissociated partner and the partnership aree to set a buy out price; 5ee /.PA 0 +$(e)8o (f the parties can a"ree on a value, that is bindin"

9hat happens i2 they cannot aree on a price; 5ee /.PA 0 +$(e)> (i)8o (f they can’t a"ree, the dissociated partner can ma)e a demand for payment.o Kithin 2-3 days, the partnership can pay out what it estimates it owes.o (f the dissociated partner is not satis#ed, he has 2-3 days to "o to court.

5rong"ul 7issociation Buyout

9hen a 4ron2ully dissociatin partner is bouht out> ho4 is the price set;5ee /.PA 0 +$(c)8o 9uyout price will be oset for dama"es

9hen does a 4ron2ully dissociatin partner recei=e the buy out; 5ee/.PA 0 +$(h)8o (f there is a term or underta)in" of the partnership, the buyout will not happen to

the end of the term.

o %xception: the dissociated partner must "o to court and show that there is noundue hardship in ma)in" the partnership pay before the end of the term $notli)ely%.

Liability o" Bought Out $artner -oes a bouht out partner remain liable 2or partnership debts; 5ee /.PA 0

+,8o The third8party creditor can still loo) to the dissociated partner for a liability that

was incurred 9<@O< the dissociation

-oes it matter i2 the liability 4as incurred be2ore or a2ter dissociation;

o enerally, the dissociated partner is not liable for liabilities incurred @T<O thedissociation



o -3# AE6?(b!: %xception

(f, within - years of the dissociation, the third8party creditor reasonablybelieved that the dissociated partner was still a partner and is not deemed tohave received notice of that dissociation.

I2 a partner has to pay a partnership debt a2ter he is bouht out> does the partner ha=e any recourse aainst the partnership; 5ee /.PA 0 +$(d)8o (f that dissociated partner has to pay that post8dissociation liability, he can "et

indemnity from the partnership

#ettlement o" accounts:

Bnce the partnership is dissol=ed and its business 4ound up> ho4 are partnership assets applied and distributed; 5ee /.PA 0 +(a) (b)8o /.PA 0 +(a): (n windin" up a partnership's business, the assets of the

partnership, includin" the contributions of the partners re6uired by this section,must be applied to dischar"e its obli"ations to creditors, includin", to the extentpermitted by law, partners who are creditors. ny surplus must be applied to pay

in cash the net amount distributable to partners in accordance with their ri"ht todistributions under subsection $b%.

o /.PA 0 +(b): <ach partner is entitled to a settlement of all partnershipaccounts upon windin" up the partnership business. (n settlin" accounts amon"the partners, pro#ts and losses that result from the li6uidation of the partnershipassets must be credited and char"ed to the partners' accounts. The partnershipshall ma)e a distribution to a partner in an amount e6ual to any excess of thecredits over the char"es in the partner's account. partner shall contribute to thepartnership an amount e6ual to any excess of the char"es over the credits in thepartner's account but excludin" from the calculation char"es attributable to an

obli"ation for which the partner is not personally liable under =ection F3G.

9ho is paid !rst; Creditors; Partners; 9hat about creditors 4ho are also partners;o !reditors are paid #rst.o Eext settle accounts.o (f there is anythin" left over, pay the rest e6ually.o 5artners are liable for their debts.o =hareholders may lose investment if a creditor can’t be paid8 that’s why they’re

paid #rst.



Introduction to %orporations

9hat is a corporation;o separate le"al entity formed under the authority of a state statute.o <xistence depends on #lin" with state.

9ho are the “players”;

o =hareholders wners. <lect the board of directors Sote on ma0or corporate actions or fundamental chan"es.

o ?irectors ana"e the business =et business policy =elect o>cers

o >cers and other employees ct as a"ents of the board <xecute board’s decision ana"e day8to8day operations

9hat are shares (a8?8a8 stoc?);o (ntan"ible property that represents ownership in a corporation.

9ho are shareholders (a8?8a8 stoc?holders);

o !ollectively *own+ the corporation.o s a shareholder, you do not have any ri"ht to male business decisions for the

corporation, nor are you an a"ent of the corporation.

Are shareholders personally liable 2or the corporations debts;o Eo they are not due to limited liability.

Is stoc? enerally 2reely trans2erable;o !ommon stoc) is almost always freely transferable.

-o corporations ha=e perpetual existence;o es.

-oes the 4ithdra4al o2 a shareholder cause dissolution;o Eo.



%orporate #tructure

5hareholderso =hareholders are the owners of the corporation. They do not directly mana"e the

business and aairs of the corporation. The 9oard of ?irectors does. Theresponsibility of the shareholders is to elect the board of directors. They also havethe ri"ht to vote on certain fundamental chan"es, one of which is a mer"er.

6he Doard o2 -irectorso The 9oard of ?irectors is the body that has the authority to mana"e the business

and aairs of the corporation. 9ut the 9oard does ET deal with the corporationon a day8to8day basis.

Bcerso >cers mana"e business and aairs on a day8to8day business. Traditionally,

these were the 5resident, S5, =ecretary, and Treasurer. The modern terms are!hief <xecutive >cer $!<%, !hief @inancial >cer $!@%, !hief peratin">cer $!%, etc.

• This structure wor)s well in the context of very lar"e, publicly traded companies.

• The odel 9usiness !orporation ct applies re"ardless of the si&e of the company$althou"h there are some provisions that apply only to the small corporations%, butmany of the rules contemplate lar"e companies.

• !an an individual be a shareholder, director, and o>cer simultaneouslyQo <=.o <x. Tim !oo), is the !< of pple. Je is also on the 9oard of ?irectors, and li)ely

owns some shares of pple.

• Khen a company is small, it is possible that there can be one individual who ma)esup the entire !orporate =tructure $ne shareholder, who is also the ?irector and the>cer%.

5hat Is %orporate Law;

5tate 5tatutes:o odel 9usiness !orporation ct is our primary statutory authorityo @L is based on the 9!o =ometimes, we will loo) to ?elaware law, because that is the most important

state when it comes to corporate law.

Articles o2 Incorporation Dyla4so enerally, rticles of (ncorporation and 9ylaws "overn the internal aairs of a

corporation $=imilar to a 5artnership "reement 1 can be used to amend provisionin the 9!%

Case La4o !ase law is important when we tal) about the #duciary duties of directors and

o>cers. ?irectors may have con7icts of interest.



1ederal statuteso Federal ecurities Laws: =ecurities ct of 2RFF and the =ecurities <xchan"e ct of

2RFI 1 concerned with the issuance of securities $which are broader than 0uststoc)s%

#tate o" Incorporation

<ay a corporation incorporate in any state;o es. corporation may incorporate in any of the D3 =tates, ?.!., or even

overseas.o (f you are "oin" to represent a mom8and8pop business that will only operate in @L,

it wouldn’t ma)e sense to loo) to another state to incorporate in. $=mall business,or closed corporations W form the corporation in the state where the corporation islocated%

In 4hat state should you incorporate your corporation; Is your ans4erinFuenced by 4hether the corporations stoc? 4ill be publicly traded or

not;o @or your small business, if you form the corporation, usually, you form within the

state you plan on doin" business in.o (f it is a publicly traded corporation ?elaware is usually the place of incorporation.o 5ublic companies $i.e. stoc) is publicly traded% have a preference for ?elaware.

Jistorically, ?elaware was tryin" to attract business to its state, so it wasa""ressive in bein" on the leadin" ed"e of developin" corporate law, and it wasperceived to be mana"ement friendly.

9hy is -ela4are a popular state to incorporate 2or public corporations;

o @riendly in allowin" companies to come ino o minimum capital re+uirementso The need for only one incorporator $a corporation may be the incorporator%o !aorable "ranchise ta in comparison to other states.

o ?elaware, unli)e most other states, has a separate court system that hearscorporate cases. This is very unusual. The 0ud"es are alle"edly very experiencedin corporate matters.

9hat is the “internal aairs” doctrine;

o The state where it is incorporated in will "overn the corporation’s internal aairs.o Khen there is a dispute over the "overnance of a corporation $ex. Khat notice will

"o out to shareholders for a meetin"%, the state of incorporation "overns theinternal aairs, even if its head6uarters are in another state or it is doin" businesssomewhere else. =o, a Tampa company incorporated in ?elaware will have its internal aairs

"overned by ?elaware law.

!ormation o" a %orporation1. The Incorporator?s@ -le the )rticles o" Incorporation.

o Le"al Eameo Eumber of authori&ed shares8shares you are entitled to issue at any time



o utstandin" shares8subset of authori&ed shares that are actually issued andoutstandin"

o Eame of Oe"istered "ento ddresso Kill be an authority on the internal aairs.

2. Organizational eeting KB%) 62.4?a@?2@o (ncorporator$s% elect initial board of directors

8. )"ter IncorporationM Hold !irst eetingo ppoint o>cerso dopt bylaws: can be any provisions for mana"in" the business and re"ulatin" the

aairs of the corporation as lon" as it is not inconsistent with law or the articles of incorporation.

o (ssue =hares To =hareholders $subscription a"reement%

)rticles o" Incorporation

9hat are articles o2 incorporation (a8?8a8 certi!cate o2 incorporation);

o Mandatory Terms (MBCA § 2.02(a)) Name & Address of Incorporators (must have or more)

• Incorporator s!"ns and f!#es the art!c#es

Can be a person OR an entity (Majority View), but in NY it must be a person

• $ften a #a%yer

A"ent for erv!ce of 'rocess

e"!stered A"ents Address

Name of Corporat!on

Nature of the *us!ness or purposes to *e conducted or promoted

Must have at #east c#ass of common vot!n" stoc+ (the num*er of shares the corporat!on !s

authorized to !ssue , *ut remem*er- they dont necessar!#y need to !ssue them a##) Must !nc#ude corporat!on suff!/ !e. Corp.- co.- !nc. (MCBA .0)

o $pt!ona# Terms , MCBA 2.02(*) , dont necessar!#y need to *e !n the Art!c#es

Names and addresses of !n!t!a# d!rectors

o Must 1!#e the charter %!th the ecretary of tate and 'ay eu!red 1ee

3nder MCBA 2.04- 1!#!n" %!th the $ starts the corporat!ons #!fe/

• 'roof of va#!d format!on of *us!ness

• 5ou are a corporat!on !n the eyes of the #a% (6de 7ure corp8)

-o articles o2 incorporation become a public document;

o es.

9hat 4ord or 4ords must the name o2 a corporation contain; 5ee <DCA 0

%8+$8 9hy do you suppose the name must contain one o2 these 4ords;o Must !nc#ude corporat!on suff!/ !e. Corp.- co.- !nc. (MCBA .0)

o This is so the third party understands that they are dealin" with a LL!.

Could you choose Apple Computer> Inc8 as the name o2 your ne4corporation; 5ee <DCA 0 %8+$(b)8



o Eo, pple is re"istered in every state.

Bylaws

9hat are byla4s; 5ee <DCA 0 "8+'(b)8

o The bylaws of a corporation may contain any provision for mana"in" the businessand re"ulatin" the aairs of the corporation that is not inconsistent with law orthe articles of incorporation.

Are byla4s public record;

o Eo

<ust a corporation adopt byla4s under the <DCA; 5ee <DCA 0 "8+'(a)8

o The incorporators or board of directors of a corporation shall adopt initial bylawsfor the corporation.

$romoters Promoter: =omeone who purports to act as an a"ent of the business prior to its

incorporationo Je is actin" on behalf of the corporation that hasn’t yet been formedo ets the corporation up and runnin" $*advance team+%o Je is an or"ani&er, actin" as an a"ent, but isn’t really an a"ent $cannot be an

a"ent of somethin" that does not yet existremember he is a promoter pre8incorporation%

o 5romoter retains liability on pre8incorporation contracts unless and until promoter"ets a novation

o 5ay promoter either with stoc) or moneyo *=): Khenever have promoter, loo) for liability 1 he mi"ht enter contract on

behalf of the corporation, but the corp has not yet been formed

Example: Promoter 4ould li?e to et a deal 2or oce space 2or a , year period o !orporation he is wor)in" for has yet to be incorporatedo 5romoter si"ns as an a"ent for yet to be formed corporation but he has not been

authori&ed Xbecause corporation does not yet existYo 5romoter believes that the corporation will ratify his contract Xbefore this point

promoter is an unauthori&ed a"ent and liable for all of this debtY

• $reCIncorporation %ontracts: contracts 9<@O< there exists a le"al corp.o Eeed promoter to enter into them before corp. is o>cially formed

Liability on $reCIncorporation %ontractso Three 5ossible outcomes for pre8incorporation contracts si"ned by a promoter:

Promoter retains liability> corporation has none

• Eo novation N !orp did not explicitly or implicitly a"ree to be bound bycontract



Promoter and corporation both ha=e liability

Eo novation N !orp a"reed to be bound either explicitly $throu"h words% orimplicitly $conduct%o (mplicit a"reement to be bound8 !onduct:

7o,ing "nto Gce pace

#ccepts 'enets o) Contract

o

s a matter of law, actions ta)in" advanta"e of the U is the same asexplicitly a"reein" to be bound.

Promoter has no liability> corporation has liability H reuires

BJA6IB

• nly way for promoter to be relieved of liability for pre8incorporationcontracts is novation $a"reement between 5romoter, !orp N Fd 5arty%.o 5romoter retains liability on pre8incorporation contracts unless and until

he "ets a novation

o @or novation, need !orp to a"ree to release him from the contract, that

only !orp is bound, and the Third 5arty consents and a"rees. $i.e.Landlord of >ce =pace%

9hy 4ont rati!cation 4or? 2or pre#incorporation areements;o Oati#cation only wor)s when there is an unauthori&ed act that occurred 1 act

could’ve been authori&ed at time entered into but wasn’t and principal a"rees tobe bound later.

9hy rati!cation 4ont 4or? no4;o !an’t ratify because the day the promoter entered into the pre8incorporation

contract, there was no corporation in existence.

o The corporation didn’t exist at time of contract, so couldn’t have authori&ed attime contract as made into.

o 5rincipal wasn’t in existence when unauthori&ed act occurred There was no a"ent because there was no actual principal $only purported

a"ent%

o 'ule: can never ratify pre8incorporation contract b/c corporation didn’t exist attime contract entered into.

5rincipal must be in existence when unauthori&ed acts occurred eed noation, not rati-cation

!inancing The %orporation

9hat are the t4o primary 4ays to !nance a corporation 4ith sucient

money so that it can operate; 9hats the dierence bet4een euity anddebt;o %uity: 9uyin" shares

=hares/stoc) represent an ownership interest.



o Debts: 9orrowin" money or issue debt instruments $bonds% The bondholders are creditors of the corporation8 the corporation will pay bac)

with interest over a period of time.

9hat is an “issuance”;

o (ssuance of shares re6uires approval at a meetin" at which a 6uorum exists if it’sissue for somethin" other than cash E? if the stoc) oerin" is more than -34 ofthe stoc)s currently outstandin" $votin" shares%. (.e. er"er, typically not needed

9hats the dierence bet4een “authori@ed” shares and “issued andoutstandin” shares; 5ee <DCA 00 '8+$ '8+,8o #uthori8ed shares: shares you are entitled to issue at any timeo utstanding shares: subset of authori&ed shares that are actually issued and

outstandin"

#toc>

<ay a corporation ha=e more than one class o2 stoc? 4ith dierentdi=idend and liuidation pre2erences> =otin rihts> and so on; 5ee <DCA 0'8+$8o es

9hat is common stoc?;o type of stoc) that represents the '*#I7A)L value of the corporation; common

stoc) has no special contract ri"hts or preferences; so creditors and preferredshareholders must receive their re6uired interest and dividend payments before

common stoc)holders "et ETJ(E.

o !ommon stoc) has no #xed maturity date $date when the debt is done/due%; if thecorporation is li6uidated, the creditors and preferred stoc)holders are paid thevalue of their interests #rst, and common stoc)holders are paid the value of theirinterests, if any, last.

o Jierarchy of 5ayment: !reditors, 5referred =toc)holders,



!ommon =toc)holders

o rdinarily, common stoc)holders have the exclusive ri"ht to elect the board ofdirectors who mana"e the corporation

o They may also "et to vote on mer"ers and other important matters.

o (n return for their investment, common stoc)holders receive ?(S(?<E?= declaredby the board of directors

o !ommon stoc) is fre6uently the only class of stoc) outstandin";

o (t "enerally represents the "reatest proportion of the corporation’s capitalstructure and bears the "reatest ris) of loss should the enterprise fail 9ut in return for this position of subordination, the common stoc)holders have

an exclusive claim to the corporate earnin"s and assets that exceed the claimsof creditors and other shareholders

Therefore, the common stoc)holders bear the ma0or ris)s of the corporate

venture, yet stand to pro#t the most if it is successful.• They can bene#t either from appreciation or cast/stoc)/property dividends.

9hat is pre2erred stoc?;o n e6uity security that is "iven certain preferences and ri"hts with re"ard to

assets or dividends over common stoc). They have contractual ri"hts superior tothose of common stoc); it is *preferred+ to common stoc) 1 it ta)es priority overthe common stoc) in some way, usually either in terms of dividends or li6uidationpreferences or both.

o $re"erences: Li+uidation $re"erence: The ri"ht to be paid before the common

stoc)holders if the corporation is dissolved and li6uidated. The li6uidationpreference is usually stated in a dollar amount.

*ample: a corporation issues a stoc) that has a li6uidation preference ofC-33. This means that if the corporation is dissolved and li6uidated, theholder of each preferred share will receive at least C-33 before the commonstoc)holders will receive anythin". Eote that since the corporation mustpay its creditors #rst, there may be insu>cient funds to pay even thispreference.



'emember Order o" $ayment ?Li+uidation@:o utside !reditors 8Z (nside !reditors 8Z 5referred =toc)holders 8Z

!ommon =toc)holders

7iidend $re"erence: The ri"ht to receive a #xed dividend at set periodsdurin" the year, li)e every 6uarter. The dividend rate is usually a setpercenta"e of the initial oerin" price.• *ample: (f a stoc)holder purchases C23,333 of a preferred stoc) that pays

an H 4 annual dividend. The stoc)holder has the ri"ht to receive CH33 eachyear as a dividend on the preferred stoc).

• !ommon stoc)holders have E O(JT to a dividend; !ontract ri"ht to adividend for preferred stoc)holders.

• %umulatie diidend right: corporations must pay a preferred dividend ifthey have the earnin"s to do so. !umulative preferred stoc) provides thatany missed dividend payments must be paid in the future to the preferredstoc)holders before the common stoc)holders can receive any dividends.

• onC%umulatie pre"erred: dividends do not cumulate; the corporationdoes not have to pay any missed dividends. @or these shares, only thecurrent year’s dividends must be paid to preferred shareholders prior to thepayment of dividends to common shareholders.

• 5referred stoc)holders would choose to have cumulative dividends;common stoc)holders would choose to have preferred stoc)holders "etnoncumulative dividends

o $articipation $re"erence: llows the stoc)holder to participate in the pro#ts of

the corporation, alon" with the common stoc)holders. 5articipation is in additionto the #xed dividend paid on preferred stoc). The terms of the participation canvary widely. sually, the common stoc)holders must be paid a certain amount ofdividends before participation )ic)s in. $re"erred stoc>holders share in common stoc>holder pro-ts

• !ommon stoc)holders JT< this stipulation%

o %onersion 'ight: 5ermits the stoc)holders to convert their shares into anothersecurity, typically, common stoc). The terms and exchan"e rate of the

conversion are established when the shares are #rst issued. The holders of theconvertible preferred stoc) usually exercise this option if the corporation’s stoc)increases si"ni#cantly in value. conversion ratio must be built in for these options $won’t convert if common

stoc) is at or below the price of the preferred stoc)% =ource of discontent amon" common stoc)holders because this ri"ht has a

dilution eect on stoc)s 28Time !onversion

o 'edemption 'ight: 5ermits the corporation to redeem/buy bac) the preferredstoc) at some future date. The terms of the redemption are established when the



shares are #rst issued. !orporations usually redeem shares when the currentinterest rate falls below the dividend rate on the preferred stoc). s soon as the corporation has the contractual ri"ht to redeem stoc) it will [nly thin" that ma)es preferred stoc) less valuable

9hat is “par =alue”; <ust stoc? ha=e a par =alue under the <DCA; 5ee<DCA 0 "8+"(b)(i=)8o inimum amount you can issue a share for $ex. C2/share%

• $roblem C1N: 9! !orp. has two classes of stoc): $2% common stoc), of whichthere are 23,333 shares outstandin", and $-% preferred stoc), of which there areD,333 shares outstandin". The preferred stoc) has a C23 per share li6uidationpreference. 9! !orp. has dissolved. fter li6uidatin" its assets, it had C-33,333 incash. Jowever, it owes creditors CD3,333. <ow will this money be di,ided among(B! creditors+ (=! holders o) pre)erred stoc0+ and (?! holders o) common stoc0+ i) the pre)erred stoc0Hs liuidation pre)erence is non>participating1 <ow does your answerchange i) the pre)erred stoc0Hs liuidation pre)erence is participating1C-33,333

x D3,333

!reditors 2D3,333x D3,333\\\\\ 5referred $D333 5= x C23/share BD3,333% 233,333 !ommon =hares $233) ] 23) common shares B C23/share%utside !reditors 8Z (nside !reditors 8Z 5referred =toc)holders 8Z !ommon

=toc)holders

7iidends ( 7istributions

• Di,idends: when you receive a percenta"e of the stoc) that you own after a year. i.e.if you are a preferred stoc)holder, and you put in C2,333, and the shares are FCapiece, you’d "et CF,333 at the end of the year

o This decision is always within the discretion of 9oardo Eever open to =J discussion

• #ppreciation: only reali&ed a"ter you sell your stoc> $which has become morevaluable%

#hould a board declare a diidend; Its )L5)# a BF' "or the BO)'7 todecidePPo ?ecided on a case by case basis by some companieso ?ividends are always paid by some companies, never paid by otherso (s the decision of a board to pay or not to pay dividends open to shareholder

debateQo E 1 this would be a usurpation of the 9oard’s authority $lways within the

discretion of the board to declare a dividend% [7*!IITIO O! BA#I*## FA70*T

• $roblem C22: The only outstandin" shares of rape !orp. stoc) are -,333 sharesof common stoc). rape's most recent balance sheet shows that it has C233,333 ofassets, CP3,333 of liabilities, and shareholders' e6uity of CF3,333. 9hat is themaximum amount o) di,idends that Irape Corp. could pay on its common stoc0 and pass the “balance sheet test o) 7'C# A J.6(c!(=!1 9hat is the per>share amount o) that di,idend1



o ssets 1 Liabilities B =hareholder <6uitieso 233) 8P3) B F3)

C2D per8share amount.

• $roblem C28: =ame facts as 5roblem D8--, except that rape !orp. also has 2,333shares of preferred stoc) outstandin", which have a CD per share li6uidationpreference. 9hat is the maximum amount o) di,idends that Irape Corp. could payon its common stoc0 and pass the “balance sheet test o) 7'C# A J.6(c!(=!1 o ssets 1 Liabilities B =hareholder <6uitieso 233) 8P3) B F3) =hareholder <6uities

F3) =hareholder <6uities D) 5ref. =hareholder =hares -D) !ommon =hares

• $roblem C29: The only outstandin" shares of ran"e !orp. stoc) are P,333 sharesof common stoc). ran"e's most recent balance sheet shows that it has C2G3,333 of assets and CP3,333 of liabilities. 9hat is the maximum amount o) di,idends thatrange Corp. could pay on its common stoc0 and pass the “balance sheet test o)

7'C# A J.6(c!(=!1o C2G3) 8 CP3) B CR3) =hareholder <6uity

• $roblem C2: =ame facts as 5roblem D8-I, except that ran"e !orp. also hasF,333 shares of preferred stoc) outstandin", which has a CP per share li6uidationpreference. 9hat is the maximum amount o) di,idends that range Corp. could payon its common stoc0 and pass the “balance sheet test o) 7'C# A J.6(c!(=!1o F,333 x P/share B C-2)o CGR) common

• $roblem C2E: The board of directors of =trawberry !orp. was advised by thecompany's accountants and lawyers that the maximum amount of dividends that thecorporation could pay was C23,333. Eonetheless, the board declared total dividendsof C2D,333 and the corporation paid this amount to its shareholders. 9hat is theboardHs liability+ i) any1 ") the board members are liable+ to whom are they liable19ill any o) the shareholders who recei,ed the di,idend be liable to repay it1o There is an ille"al distribution of CDU o The directors who ,oted or assented to the illegal distribution are 0ointly and

severally liable to have to repay the amount to the corporationo The shareholders who received the dividend will not be liable to repay it $unless

there is a shareholder who was also director, in which case his liability is based on

his bein" a director, not a shareholder%

In 0eneral

• 9ecause a corporation is a le"al entity distinct from its shareholders, the ri"hts andobli"ations of a corporation are normally separate from those of the shareholders.



nder the corporate statutes, a shareholder normally has no liability for corporatedebts or other obli"ations. (nstead, her liability8more accurately, her ris)8is limited tothe loss of her investment.

• nder certain circumstances, shareholders can be found liable to corporate creditors.o (n such cases, it is said, the courts ^pierce the corporate veil.^o The tests for whether the corporate veil will be pierced are "enerally va"ue.

ften, courts put the issue in terms of whether the corporation was the alterego;instrumentality of its shareholders.

• ne common formulation is that a corporate entity will be disre"arded, and the veilof limited liability pierced, when two re6uirements are met.o @irst, there must be such unity o) interest and ownership that the separate

personalities of the corporation and its shareholder or shareholders no lon"erexist.

o =econd, circumstances must be such that adherence to the #ction of separatecorporate existence would sanction a )raud or promote in@ustice.

(n determinin" whether a corporation is so controlled by another to 0ustifydisre"ardin" their separate identities, the cases focus on four factors:B. The commingling o) )unds or assets+

o commin"lin" of the corporation's assets and the shareholders' personalas8 sets occurs when the shareholders have dealt with the assets of thecorporation as if those assets were their own, e.g.+ by usin" corporatefunds to pay private debts, or by usin" corporate assets for other privatepurposes.

=. The )ailure to maintain adeuate corporate )ormalities+o lso relevant to piercin" the corporate veil is whether basic corporate

formalities were followed (e.g.+ whether stoc) was issued, corporaterecords maintained, directors or o>cers elected, and re"ular meetin"s of directors and shareholders held%.

?. 3ndercapitali8ation+ ando n extremely important factor in decidin" whether the corporate veil

should be pierced is whether the corporation was or"ani&ed withsu>cient resources, by way of capital, liability insurance, or both, tomeet the obli"ations that reason8ably could be expected to arise in itsbusiness. The issue here is not whether the shareholders have respected and

maintained the corporation as a separate entity; rather, the issue iswhether the shareholders should reasonably have anticipated that thecorporation would be unable to pay the debts it would be li)ely toincur.

The rationale of piercin" the veil on the basis of undercapitali&ation isthat the le"islature, in conferrin" limited liability, assumed thatshareholders would in "ood faith put up unencumbered capital $orinsurance% reasonably adeuate )or its prospecti,e liabilities.



. Domination and controlo !ourts will often pierce the corporate veil of one corporation, !, when a

share8 holder who owns most or all of !'s stoc) so completely dominates

!'s policy and business practices that ! can be said to have no separatemind, will, or existence of its own. The prime example occurs when aparent corporation directly deter8 mines the business policy of asubsidiary, rather than allowin" that policy to be determined by thesubsidiary's board. (n contrast, the court is less li)ely to pierce asubsidiary's veil if the subsidiary's business policies are determined by itsown board, even thou"h the directors are elected by the parent, andeven thou"h they are also o>cers or employees of the parent.

• Limited Liability "or Owners $when done correctly% 1 owners are shareholderso wners liability for #rm debts is capped by individual contributions $*shares+%

The most you can lose is what you put in and own !reditors 1 if run out of money before run out of creditors, creditors "o away

o B%) 6 D.22?b@: *nless otherwise provided in the articles of incorporation, ashareholder of a corporation is not personally liable for the acts or debts of thecorporation except that he may become personally liable by reason of his ownacts or conduct.+ (f you behave yourself as a shareholder the most you can lose is the value of

your shares X(n sharp contract to a partnershipY• =hareholders that behave properly are not personally liable for the acts or

conduct of the corporation $unless you become personally liable by reasonof your own acts or conduct then can pierce the corporate veil%

$iercing The %orporate Qeil

• Ieneral -ule o) hareholder /on>Liability:

o (f the corporation’s debts exceed its assets then the corporation’s creditors maynot recover the unpaid amounts from the shareholders. The most shareholders can lose is their investments.

o (t protects shareholders from the corporation’s debts. (f a court allows a creditorto pierce the corporate veil, then what has happened is that one or more of theshareholders will be personally liable for what is otherwise a corporate debt.

• Factors 9hen Determining ") Corp. Keil hould 'e ierced:

o Khether the corporation was ade+uately capitalized.

o Khether the corporation observed corporate "ormalities

o Khether shareholders siphoned o corporate fundso Khether the corporation acted as a "acade for the shareholder.o Khether "raud, lies, or misrepresentations were involved.



• 'ottom Line: (s it E@(O to allow the corporate shield to standB this is the main6uestiono 5hen the corporate eil is pierced then the shareholder is personally

liable.

• The doctrine of piercing the corporate ,eil only applies if the debtor corporation isclosely held.

• Closely <eld Corporations: o !orporations that have a small number of shareholders.

-euirements:

• =mall number of stoc)holders $Less than 23%

• Eo ready mar)et of stoc)

• =ubstantial ma0ority stoc)holder participation in the mana"ement, direction,operations of the corporation.

• =toc)holders run the day8to8day operations.

• Jard to sell shares

• <mployment opportunity/investment Ba lot li)e a partnership

• Limited Liability of =hareholders

• 9hat i) the shareholder o) the debtor corporation isn*t an indi,idual+ but is itsel) a

corporation1o (f a ma0ority of a corporation’s stoc) is owned by another corporation, then the

#rst corporation is a subsidiary (child! and the second corporation is a parent .o 5arent/!hild !orporation

=ubsidiaryB more than _ owned by the parent corporation. 5arent8=ub 5iercin":

• Khether subsidiary was ade+uately capitalized

• Khether there are separate records bein" )ept.• Khether subsidiary obsered corporate "ormalities

• Khether the parent siphoned o subsidiary’s funds.

• Khether the subsidiary acted as a "aRade for the parent.

• Khether parent and subsidiary hae common directors and ocers $common control%.

Inoluntary creditors ?i.e., tort creditors@ may be more li>ely to pierce thecorporate eil than oluntary creditors ?i.e., contract creditors@. 5hy doyou suppose this is the case;

o 9ecause involuntary creditors do not willin"ly embrace unsecured status, andcreditors who contract for unsecured status voluntarily but in i"norance ofsecurity's threat.

Ko4 can contract creditors protect themsel=es;o Ta)in" a security interest in real property

5hat "actors go into piercing the corporate eil o" a close corporation; Isany one "actor determinatie;o Dania 2ai>#lai alace "nc. ,. y0es:



lter e"o/ mere instrumentality (mproper conduct $@raud, (lle"ality, r"ani&ed or used to mislead creditors% !ausation

*nterprise Liability

*nterprise liability only wor>s when the companies that you hae broughtinto the corporation hae other assets ?SHorizontal Qeil $iercing@o Loo)s at a unity of interest between corporations and allows you to sue each as a

sin"le entityo %nterprise liability allows you to scoop up assets hori&ontally $throu"h corporation

to related corporation%o 5!S allows you to "et at individual shareholders.

5hat does *nterprise Liability depend on;o Jere are some factors to consider in determinin" whether two or more

corporations have been operated as a sin"le business enterprise: !ommon employees; !ommon record )eepin"; !entrali&ed accountin"; 5ayment of wa"es by one corporation to another corporation’s employees; common business name; =ervices rendered by the employees of one corporation on behalf of another; ndocumented transfers between corporations; nclear allocation of pro#ts and losses between the corporations; The same o>cers; The same shareholders; and The same telephone number.



Board o" 7irectors

5hat is the board o" directors;o The board of directors is the ultimate source of decision8ma)in" authority in the

corporation.

%B) 6 J.41. 'e+uirement !or )nd 7uties O" Board O" 7irectorso 7C'# A .6B(a!: <xcept as provided in P.F-, each corporation must have a board

of directors.

o 7C'# A .6B(b!: ll corporate powers shall be exercised by or under the authorityof, and the business and aairs of the corporation mana"ed by or under thedirection of, its board of directors, sub0ect to any limitation set forth in the articlesof incorporation or in an a"reement authori&ed under P.F-.

How does the board approe or rati"y transactions;

o Consent -esolution: no meetin" of the 9? they contact each other directly and adocument is prepared where they si"n and approve without a meetin".

• <eetins:o Kho has the power to call or convene the meetin"Q

The board of directors

o Khat )ind of notice, if any, is re6uired to be sent to directors informin" them ofthe forthcomin" meetin", includin": <ow soon be)ore the meeting must it be sent1

• Two or more day’s notice re6uired of date, time and place but not thepurpose of the meetin". 9! H.--o /otice: must be in writin" unless verbal notice is

9hat must the notice contain1

• ?ate, Time, and 5lace 9T ET 5O5=<

Does it ma0e a di$erence i) the board meeting is a special meeting or a

regular meeting1 ee 7'C# A .==.



• -egular 7eeting:

o eetin"s that are #xed in the bylaws of the corp.o Eo notice re6uirement because notice is in the bylaws already.

• pecial 7eeting:

o Two or more day’s notice re6uired of date, time and place but not thepurpose of the meetin". 9! H.--

o

/otice: althou"h formal notice is unnecessary for a re"ular meetin",special meetings re6uire notice to every director of the date, time,andplace of the meetin".

!an a director waive ri"ht to noticeQ (f so, whenQ 9efore or after the meetin"Q(f a director attends a meetin", does he waive ri"ht to noticeQ ee 9! H.-F.

o sually, notice can be waived in writin" before or after a meetin".ttendance waives notice unless the director attends only to protest themeetin".

Khat is a uorum of the board of directorsQ ee 9! H.-I$a%.• ma0ority of the total number of authori&ed directors

Jow many directors must be present at a meetin" to constitute 6uorumQ7'C# A.=(a!. ay the articles or bylaws #x a "reater of lower number6uorum re6uirementQ 9! H.-I$b%.• The certi#cate or bylaws may specify that any percenta"e "reater or lesser

than a ma0ority constitutes a 6uorum but they may not specify a percenta"eless than one third of the total number of authori&ed directors.

Khat does it mean for a director to be *present+ at a meetin"Q ust a director

be physically present at the meetin"Q ee 9! H.-3$b%.• s lon" as everyone can simultaneously hear each other then they are

deemed present.

o ssumin" 6uorum is present, how many directors must approve a particularproposal for valid board actionQ ee 9! H.-I$c%. (f 6uorum exists when vote ta)en, a>rmative vote of a0ority of directors

present B action of the board unless rticles/bylaws re6uires more. ?irectorsmay abstain, vote yes/no. To abstain/dissent, must not vote in favor as noted inminutes E? ob0ect at be"innin" of meetin" /deliver written notice of

abstention to corporation durin" meetin"/immediately thereafter.

o ay the board act informallyQ (n other words, may the board ta)e action withouta meetin"Q es, throu"h a consent resolution.

Ocers

5ho are the ocers o" a corporation and what is their "unction;



o odel ct does not speci#cally say what o>cers are needed; some states willre6uire a 5resident, Sice 5resident, =ecretary, and Treasurer. Eow !<, !@, !,etc. Loo) to corporation’s bylaws to see what o>cers it has, how they are

appointed, and what authority they have.

5hen do ocers hae actual authority to bind the corporation;

o 9ylaws may have actual authorityo resolution would "ive the actual authority to an o>cer to si"n a contract on the

corp. behalf.o nly authori&ed o>cers can bind the corporation.o uthority may be:

#ctual $expressed in bylaws or by valid board resolution%, apparent

$corporation"ives third parties reason to believe authority exists%, or power o) position $inherent to position%. (f ratied by the board, even unauthori&ed actsmay bind the corporation.

5hen do ocers hae apparent authority to bind the corporation;

o pparent uthority is somethin" the principle has done which "ives someone theimpression that they have the authority to act.

o The ma0ority rule is that the president has power to bind the corporation intransactions arisin" in the ordinary and regular course of business.

#cope o" #hareholder )uthority

5ho can be a shareholder o" a corporation; ust a shareholder be anindiidual;o corp. may be a shareholder of another corp. $a parent/sub corp.%o ny le"al entity capable of ownin" property.

7o shareholders hae management rights; On what matters is ashareholder ote necessary;o =hareholders have a very limited role:

They can select or remove the board of directors, They can vote to approve fundamental chan"es in the corporate structure They adopt, amend and repeal bylaws $with the board% They have to approve certain mer"ers and ac6uisitions They have to approve dissolutions

7o shareholders ote on dayCtoCday matters or do they generally only oteon etraordinary matters;o =hareholders are not votin" on day8to8day operations of the corp.



#hareholders< eetings

ust shareholders hold an annual meeting; 5ee B%) 6 E.41. 5hattypically ta>e place at an annual meeting;o #nnual 7eeting -euirement

<lect directors durin" this meetin" !onduct other business as necessary !an elect directors annually or sta""ered.

o pecial 7eeting

Oemove a director The board can, for cause or no cause, #re a director sub0ect to approval of the

shareholder approval.

o The failure to hold an annual meetin" on the date in the bylaws does not aectthe validity of the corporate action.

%an shareholders hold a special meeting; 5hy would the shareholdersneed to hold a special meeting;

o To approve a director or approve a fundamental chan"e

5ho can call a special meeting o" the shareholders; 5ee B%) 6 E.42?a@.

o Jolders of 234 of the shares of the corp.o !<o 5resident

ust shareholders receie notice o" a meeting; I" so, when and what mustthe notice contain; )re the re+uirements dierent "or an annual meetingand a special meeting; 5ee B%) 6 E.4. ay a shareholder waie right tonotice; 5ee B%) 6 E.4D.o Eot less than 23, no more than G3 days before the meetin" date for both annual

and special meetin"s

o Oi"ht to notice can be waived.

o They can act by written consent without a meetin".

o 9oard has to set a record date, P3 days, to #"ure out who "ets mailed the notice. -ecord Date: the day the board elects to see who owns the shares for votin"

purposes. -ecord <older: the person holdin" the shares on the record date.

o Eotice needs to contain Time of the meetin"



5lace of meetin" ?ate 5urpose for =5<!(L meetin", ET EEL

#hareholders o" a publicly traded corporation change on a daily basis. Inthis case, how do we >now which shareholder is entitled to receie noticeand to ote; B%) 6 E.4E?a@ ( [email protected] The 9? sets a record date, which states that who ever owns the shares by that

date are entitled to notice.o Oecord ?ate: the day the board elects to see who owns the shares for votin"

purposes.

How is the +uorum re+uirement met "or a shareholders< meeting; B%) 6

[email protected] `uorum a ma0ority of the shares that are 6uali#ed to vote on the issue.o (t may 0ust be one person if they hold enou"h shares $D24 owner%o (f you don’t have a 6uorum8 anythin" you vote on has no valid le"al eect.o <verythin" is *unless stated dierently in the articles or the bylaws+8 can a"ree to

lower 6uorum re6uirement.

I" all o" the shareholders are in agreement on a particular matter, do theyeen hae to hold a meeting to act; B%) 6 [email protected] es via a unanimous vote resolution.o nly will wor) with a closed corporation

*lection o" 7irectors

)s a general rule, how do shareholders elect directors; 5hat is straight

?plurality@ oting and how does it wor>; B%) 6 [email protected] lurality Koting: I;-

ou can vote up to your number of shares for each candidate.

• <x: (f you had 233, you could vote 233 for each candidate or no votes forany candidate or any combination thereof.

ou may ET accumulate your votes you can’t vote -33 on a candidate.

o Cumulati,e ,oting: pecial i) in #rticles

Kith !umulative votin" each shareholder can accumulate all votes and castthem for any one or more candidates.



@OL: The number of votes B Eumber of shares x Eumber of vacancies

• <x: 9ut cumulative you can vote I33 all on one, where you could only put amax of 233 in plurality.

o ust a shareholder actually appear at a meeting to ote; 5ee B%) 6

E.22?a@ ( ?b@. ay be met by shares represented either in person or by proxy.

5lurality ?efault ore yes than no votes=imple a0ority ore than _ present say yesbsolute a0ority ?<LKO< a0ority of the outstandin" shares=uper a0ority ny a"reement

o $roy: ppointin" someone else as your a"ent to your shares. nce your proxy has been delivered you’re there for the whole thin" even if

you leave.

Oe6uirements:

• ppointment must be in writin" and si"ned.

5roxy’s can be made irrevocable if:

• (n writin"

• =ay it’s irrevocable

• ive it to a person in interest.

bsent an irrevocable proxy they can revo)e it at any time for any reason or noreason at all.• proxy is normally revocable by the shareholder at any time, althou"hit

may be made irrevocable if expressly stated and coupled with aninterest inthe shares themselves $or in some states, an interest in the corporation%.bsent written notice to the corporation, the death or incapacity of ashareholder does not revo)e a proxy. shareholder may revo)e a proxy bynotifyin" the proxy holder, "ivin" a new proxy to some8 one else, or bypersonally attendin" the meetin" and votin".

%umulatie Qoting

9hat is Cumulati=e Jotin;o @ormula: $AT THI# O %H*)T #H*)T

X$E x =% ] $?2%Y 2 B

• E B number of directors the shareholder wants to elect

• = B total number of shares votin"

• ? B total number of directors to be chosen at the election



• B the number of shares needed to elect

Is cumulati=e =otin the de2ault rule;o Eo.o 7'C# A E.=(b!: =hareholders do not have a ri"ht to cumulate their votes for

directors unless the articles of incorporation so provide.

I2 not> 4here must cumulati=e =otin be authori@ed> i8e8> articles o2incorporation> byla4s> or either one; 5ee <DCA 0 8"(c)8o statement included in the articles o2 incorporation that all a desi"nated

votin" "roup of shareholders are entitled to cumulate their votes for directorsmeans that the shareholders desi"nated are entitled to multiply the number ofvotes they are entitled to cast by the number of directors for whom they areentitled to vote and cast the product for a sin"le candidate or distribute theproduct amon" two or more candidates.

I2 cumulati=e =otin is in place> do shareholders =ote cumulati=ely on allmatters or 7ust 2or election o2 directors;

o nly applies to shareholder votes for the election or removal of directorso ?irectors not elected seat by seat but, instead, one at8lar"e election

• (f minority shareholders vote intelli"ently, cumulative votin" will enable them toelect at least some directors between them $see example on next slide%

• =ome states re6uire cumulative votin", others leave it up to the corp.

• %xample:

o 9ritney owns H3 votin" common shares of 9!, (nc. t its next shareholders'meetin", the common shareholders will vote to #ll the ei"ht spots on the board ofdirectors. Khat is the total number of votes that 9ritney will haveQ H3 x H ?irectors up for election B GI3 votes

o Khich of the followin" is acceptable votin" by 9ritney under 9! P.-HQ 9ritney casts all GI3 votes for Mohn =mith, the candidate she li)es best.

• es 9ritney casts H3 votes each for ei"ht dierent candidates

• es. 9ritney casts 2 vote each for GI3 dierent candidates.

• es 9ritney casts GI3 votes each for ei"ht dierent candidates.

• Eo

'emoal o" 7irectors

<ay the shareholders remo=e a director 4ithout cause; 5ee <DCA 08+(a)



o es, the shareholders may remove one or more directors with or without causeunless the articles o) incorporation provide that directors may be removed only forcause.

Ko4 does <DCA 0 8+(c) protect cumulati=e =otin;

o (f cumulative votin" is authori&ed, a director may not be removed if the number of votes su>cient to elect him under cumulative votin" is voted a"ainst his removal.(f cumulative votin" is not authori&ed, a director may be removed only if thenumber of votes cast to remove him exceeds the number of votes cast not toremove him.

<iht a “2or cause” pro=ision 2or remo=al o2 directors be desirable in some

cases;o (f the corporation only wants directors to be removed for cause it has to set it up

in the articles of incorporation.

#hareholder Qoting ?on matters other than election o" directors@

• General /ule: <ach share is entitled to one vote.

9hat is Plurality (5traiht) Jotin;o ?<@LTo plurality vote has more yes than no.o lurality;traight ,oting allows one vote for each share held and applies to all

matters other than the election of directors, which may be sub0ect to cumulativevotin". nythin" over D34 of the votes cast "enerally controls. Jowever, certainfundamental chan"es $e."., mer"er% fre6uently re6uire hi"her shareholderapproval. %x: (f you had 233, you could vote 233 for each candidate or no votes for any

candidate or any combination thereof.

9hat is a simple ma7ority =ote;o nce you have 6uorum, more than half of the present shareholders vote yes.o n abstention is essentially a no vote because we are only countin" the no votes.

9hat is an absolute ma7ority =ote;o a0ority of the outstandin" shares.o ?elaware rule.

.nder the <DCA> once uorum exists> ho4 many =otes are necessary to

pass a measure; 5ee <DCA 0 8"&(c)8o 7'C# A E.=5(c!: (f a 6uorum exists, action on a matter $other than the election of

directors% by a votin" "roup is approved if the votes cast within the votin" "roupfavorin" the action exceed the votes cast opposin" the action, unless the articlesof incorporation or this ct re6uire a "reater number of a>rmative votes.

-oes the <DCA pro=ide 2or a plurality> simple ma7ority> or absolute ma7ority =ote;



o 7'C# A E.=(a!: nless otherwise provided in the articles of incorporation,directors are elected by a plurality of the votes cast by the shares entitled to votein the election at a meetin" at which a 6uorum is present. 5lurality is the default rule

#hareholder Qoting )greements

<ay shareholders o2 a close corporation aree to =ote their shares a

certain 4ay on speci!ed issues> e88> to =ote 2or each other to the board o2directors; <ust the areement be unanimous; <ust it be in 4ritin; 5ee<DCA 0 8,$(a)8o es, two or more shareholders may provide for the manner in which they will vote

their shares by si"nin" an a"reement for that purpose. votin" a"reementcreated under this section is not sub0ect to the provisions of section P.F3. ?oes not have to be unanimous, only bindin" to the shareholders who a"ree to

it in writin".

o @or a votin" a"reement to be enforceable, two thin"s must occur

2. (t must be in writin"-. ust be si"ned by the parties

9hats the remedy i2 a =otin areement is breached; <DCA 0 8,$(b)8o votin" a"reement created under this section is speci#cally enforceable.

Is a proxy issued in connection 4ith a =otin areement irre=ocable; 5ee<DCA 0 8""(d)(&)8o es. 7'C# AE.==(d!: n appointment of a proxy is revocable unless the

appointment form or electronic transmission states that it is irrevocable and theappointment is coupled with an interest. ppointments coupled with an interest

include the appointment of:D% party to a votin" a"reement created under section P.F2.



!iduciary 7uties

9hat is the duty o2 care;o 7'C# A . ?6(a!: *<ach member of the board of directors, when dischar"in" the

duties of the directors, shall act: (n "ood faith, and (n a manner the director reasonably belie=es to be in the best interests of

the corporation+

9hat is the duty o2 loyalty;o ?irectors and o>cers have a #duciary duty to put the interests of the corporation

ahead of their own.

Dreaches o2 -BC -BL are procedural prereuisites H to uphold presumption and be entitled to de2ense> need to sho4 neither 4asbreached and thus entitled to D3/ presumption and protection

7uty o" %are

• Khat is a director’s duty of careQ ee 9! H.F3$a% N $b%.o 7'C# A .?6(a!: <ach member of the board of directors, when dischar"in" the

duties of a director, shall act: (n good "aith, and (n a manner the director reasonably believes to be in the best interests o"

the corporation.

o 7'C# A .?6(b!: The members of the board of directors or a committee of theboard, when becomin" informed in connection with their decision8ma)in" functionor devotin" attention to their oversi"ht function, shall dischar"e their duties withthe care that a person in a li>e position would reasonably belieeappropriate under similar circumstances.

• 9hat is the duty;o @iduciaries must perform their functions with the care that an ordinarily prudent

person would reasonably be expected to exercise in a li)e position and undersimilar circumstances

6o 4hom do the board o2 directors o4e their duty o2 care;o corporation’s directors and o>cers owe a duty of care to the corporation

o Those who mana"e the corporation owe #duciary duties



• 9hen does the duty apply;o The duty of care applies to directors when becomin" informed with their decision8

ma)in" function or devotin" attention to their oversi"ht function.

• Causationo 5lainti must show that defendant’s failure to meet the duty of resulted in harm

to the corporation 7a@ority;7'C#: plainti must show proximate causation Delaware: once the plainti shows that the defendant breached his duty of

care, the burden shifts to the defendant to show that his actions were fair tothe corporation

9hat happens i2 a director =iolates his or her duty o2 care;o (f director or o>cer violates the duty of due care, and the corp. loses money, the

director/o>cer will be personally liable to pay money dama"es to the corporation. (t is very rare for directors and o>cers to be found liable for breach of the duty

of due care. (t is usually because there is some amount of self8dealin" but notenou"h for the court to #nd a formal violation of duty of loyalty.

Best Fudgment 'ule

9hat is the business 7udment rule (D3/);o resumption: that ?irector acted honestly and in "ood faith and reasonably in the

interest of the !orporation when ma)in" an informed decision. $=hlens)y vKri"ley%

o The business 0ud"ment rule is a presumption that in ma)in" a business decision,mana"ers acted on an informed basis, in "ood faith, and in the honest belief thatthe action was in the best interest of the company

o pplies when there is no alle"ation of con7ict of interest $i.e. duty of loyalty notimplicated%

o s lon" as business decisions are based upon reasonable information and are notirrational, mana"ers ma)in" them are not liable

o 9ehavior that is not "rossly ne"li"ent or rec)less, or decisions with any rationalbusiness purpose satisfy the business 0ud"ment rule

Is the D3/ mentioned in the <DCA or is it a 7udicially created doctrine;o Mudicially !reated

Is the D3/ a presumption or a substanti=e rule o2 la4 (or both);o 9oth

9hat is the rationale 2or the D3/;



o =hareholders voluntarily underta)e the ris) of bad business 0ud"mento fter8the8fact liti"ation is a poor device to evaluate business decisionso 5otential pro#t often corresponds to potential ris), so it is in the shareholders’

interest that law not create incentives for overly cautious corporate decisions

I2 the directors completely 2ail to act (or are obli=ious)> are they entitled touse the D3/ as a de2ense;o 9MO only applies when mana"ers have made conscious decisions.o 9MO may not apply to mana"ers who are *interested+ in the decision.o 9MO does not apply if the decision itself constitutes ille"al conduct.

I2 the directors act illeally> 2raudulently> or 4ith a conFict o2 interest> does

the D3/ apply;o The '2- C#/ '% -%'3TT%D by a demonstration o):

ross ne"li"ence or (lle"ality or fraud or !on7ict of interest

I2 the plainti is success2ul in rebuttin the D3/ presumption> are the

directors automatically liable; In other 4ords> is there anythin else the plainti must sho4;o Eo, if the plainti overcomes that presumption, they still must show harm and

causation.

<ay directors rely upon ad=ice 2rom experts and still recei=e the protections o2 the D3/; 5ee <DCA 0 8,+(d)#(2)8o The individual directors don’t have to be experts.o They are entitled to rely upon experts inside or outside the corporation so lon" as

they believe they are reliable and competent.o The directors can appoint a committee and if the committee does their homewor)

the directors can rely on them.

.pon 4hose ad=ise can the directors rely; 5ee <DCA 0 8,+(2)8

o director is entitled to rely, in accordance with subsection $d% or $e%, on: ne or more o>cers or employees of the corporation whom the director

reasonably believes to be reliable and competent in the functions performed orthe information, opinions, reports or statements provided;

Le"al counsel, public accountants, or other persons retained by the corporationas to matters involvin" s)ills or expertise the director reasonably believes arematters $i% within the particular person’s professional or expert competence or$ii% as to which the particular person merits con#dence; or

committee of the board of directors of which the director is not a member ifthe director reasonably believes the committee merits con#dence.

• 9hich -irectors Are Liable

o 7'C# .?6: conduct of entire board N de#cient performance by sin"le directormay be overcome by acceptable conduct on part of other directors



o 7'C# .=(d!: director liable if assents to challen"ed conduct. 9T, ifabstains/votes a"ainst with vote recorded in minutes, may escape liability.

o 7'C# .?B(a!(=!(i,!: duty of care includes devotion of su>cient oversi"ht tocorporation and its business.

7uty o" Loyalty

9hat is the duty o2 loyalty;o (nvolves con7icts of interest where issue is one of fairness

Applies to:o ?irectorso >cers8 a"ents of the corporationo ?oes not apply to shareholders "enerally

Jiolate Dy:o !ompetin" with the corporation,

o =elf8dealin"/con7ictin" interest,o surpin" a corporate opportunity $stealin" an opportunity%

• 9hen theres a conFict o2 loyalty> the transaction is presumed to bein=alid> unless certain procedural reuirements are met or the conFicteddirector(s) can sho4 the transaction 4as entirely 2air to the corporation(substanti=e 2airness2air price and in best interest o2 Corp)o They can show it’s procedurally fair8 the process for approvin" the transaction was

fair.o They can show it’s substantively fair8 the substance of the transaction is entirely

fair to the corp. @air 5rice E? (n the best interest of the corporation

#el"C 7ealing Transactions

9hat is a sel2#dealin transaction (a “directors conFictin interest

transaction”)o 9! H.G3$2%: ?irect

?irector is a party to a transaction with the corporation

<ust the sel2#dealin transaction be direct; In other 4ords> may a director

enae in sel2#dealin indirectly throuh a related person;o 9! H.G3$2%: ?irector’s con7ictin" interest transaction’’ means a trans8 action

eected or proposed to be eected by the corporation $or by an entity controlledby the corporation% To which, at the relevant time, the director is a party; or Oespectin" which, at the relevant time, the director had )nowled"e and a

material #nancial interest )nown to the director; or Oespectin" which, at the relevant time, the director )new that a related person

was a party or had a material #nancial interest.



o 9! H.G3$D%: Oelated person’’ means: The director’s spouse; child, stepchild, "randchild, parent, step parent, "randparent, siblin", step

siblin", half siblin", aunt, uncle, niece or nephew $or spouse of any thereof% ofthe director or of the director’s spouse;

n individual livin" in the same home as the director; n entity $other than the corporation or an entity controlled by the corporation%

controlled by the director or any person speci#ed above in this subdivision $D%; domestic or forei"n:

• 9usiness or nonpro#t corporation $other than the corporation or an entitycontrolled by the corporation% of which the director is a director,

• nincorporated entity of which the director is a "eneral partner or amember of the "overnin" body, or

• (ndividual, trust or estate for whom or of which the director is a trustee,"uardian, personal representative or li)e #duciary; or

• person that is, or an entity that is controlled by, an employer of thedirector.

Are director sel2#dealin transactions =oid or =oidable under the <DCA;5ee <DCA 0 8'$(b)8o =elf8dealin" transactions are not per se void, because there may be instances

where a related person is providin" services that are in the best interest of thecorporation.

I2 a sel2#dealin transaction is not automatically =oid or =oidable> under

4hat circumstances is a sel2#dealin transaction permissible; 5ee <DCA 08'$(b)8o Eot automatically void or voidable 1 the self8dealin" transaction is permissible in

two ways:o 5rocedural fairnesso =ubstantive fairness

#anitizing #tatute

• nder 9! H.G2$b%, a director’s self8dealin" transaction will be permissible if:o 5rocedural fairness $the process for approvin" the transaction was fair%

?irectors’ action respectin" the transaction was at any time ta)en incompliance with section H.G- Xualied director appro,alY; or

=hareholders’ action respectin" the transaction was at any time ta)en incompliance with section H.GF Xualied shareholder appro,alY; or

• =ubstantive fairness $i.e., the substance of the transaction is fair%o The transaction, 0ud"ed to the circumstances at the relevant time, is established

to have been )air to the corporation.

7%IT: ?7I'*%TO'<# %O!LI%T O! IT*'*#T T')#)%TIO@

• nli)e decisions of neutral, fair, and impartial directors, once a conUict o" interesteists, the BF' does not automatically apply.

• Bnly 2our 4ays:2. ?irector is a party on opposite side of transaction



-. ?irector has a material #nancial interest $but not party%F. Oelated person is a party on opp. =ide of transactionI. Oelated person has material #nancial int. $but not a party%

$rocedural !airnessVuali-ed 7irector )pproal

• t least - directors votin" in favor

• a)in" up an a>rmative vote of a ma0ority of the 6uali#ed directorso Kho is a *6uali#ed directorQ+

(s not en"a"ed in self8dealin" $i.e., a *director’s con7ictin" interesttransaction+%.

?oes not have a material relationship with another director who is en"a"ed inthe self8dealin" transaction. 9! 2.IF$a%$F%.• fter re6uired disclosure. ust ?isclose:

o The existence and nature of the director’s con7ictin" interest, ando ll facts )nown to the director respectin" the sub0ect matter of the transaction

that a director free of such con7ictin" interest would reasonably believe to bematerial in decidin" whether to proceed with the transaction. 9! H.G3$P%.

• `uali#ed directors must deliberate and vote outside presence of other directors.7'C# A .J=(a!(B!

I! 5* H)Q* )$$'OQ)LWBF' )$$LI*#



I! OTC #** I! #H)'*HOL7*'# 5ILL )$$'OQ*

• self8dealin" transaction $?!(T% is permissible if the transaction:o Jas been authori&ed by the a>rmative vote of a ma0ority $but no fewer than two%

of the ualied directors who voted on the transaction,o fter reuired disclosure by the con7icted director of information not already

)nown by such 6uali#ed directors. . . .+ 9! H.G-$a%.

• ma0ority of the 6uali#ed directors 6uali#es as 6uorum for this particular vote.

Vuali-ed #hareholder )pproal

• self8dealin" transaction $?!(T% is permissible if:o ma0ority of votes cast by the holders of all ualied shares are in favor of the

transaction; and Eo con7ictin" interest B 6uali#ed Eeed a ma0ority of the 6uali#ed shares to be present or represented by proxy

at this meetin" to satisfy the 6uorum re6uirement.

o =hareholders receive prior notice containin" ?escription of the action to be ta)en; ?isclosure from the director with the con7ictin" interest the number of shares

the director )nows are not 6uali#ed and the identity of the holders of thoseshares; and

(nformation that is the sub0ect of reuired disclosure. 9! H.GF$a%.

#ubstantie !airness:

• (@ E 5O!<?OL @(OE<==89O?<E =J(@T= The self8dealin" transaction is only*saniti&ed+ if the con7icted director$s% can show it’s *fair to the corporation.+

• @air to the !orporation if:o @air 5riceB =ubstanceo (n the best interest of the corporationB5rocedure

*ect o" $rocedural !airness



• (f the 6uali#ed directors $ H.G-% or 6uali#ed shareholders $ H.GF% properly approve acon7ictin" interest transaction, does that mean that the case is closed and there isno 0udicial reviewQo Eo this 0ust becomes a normal duty of care case from this.o `uali#ed =hareholders

A#A'$I0 ) %O'$O')T* O$$O'TAIT:

• I3T<>L"/% F '3"/% T%T: D%L#9#-% ('ro8 , Cellular: D%L#9#-% C#%!

o <L<<ET=:2. Khether the corporation could aord to #nancially exploit the opportunity.-. (n their line of the businessF. (s there any interest or expectancy on behalf of the corporation that they

would have this opportunityQI. Khether the interest is adverse to the corporate interest.

o *@iduciary is placed in a position inimical to his duties to the corporation.+

A7*' TH* 0ATH T*#T OA **7 )LL !OA'P

%orporate Opportunity 7octrine ?)LI Test@

9hen is a business opportunity a “corporate opportunity” under the ALIPrinciples; 5ee 0 &8+&(b) ALI Principles8o Denition o) a Corporate pportunity: @or purposes of this =ection, a corporate

opportunity means: ny opportunity to en"a"e in a business activity of which a director or senior

executive becomes aware, either:• (n connection with the performance of functions as a director or senior

executive, or under circumstances that should reasonably lead the director



or senior executive to believe that the person oerin" the opportunityexpects it to be oered to the corporation; or

• Throu"h the use of corporate information or property, if the resultin"opportunity is one that the director or senior executive should reasonablybe expected to believe would be of interest to the corporation; or

ny opportunity to en"a"e in a business activity of which a senior executivebecomes aware and )nows is closely related to a business in which thecorporation is en"a"ed or expects to en"a"e.

.nder 4hat circumstances may a corporate !duciary ta?e a corporate

opportunity 2or himsel2; 5ee 0 &8+&(a) ALI Principles8o I-: director or senior executive may not ta)e advanta"e of a corporate

opportunity unless: The director or senior executive #rst oers the corporate opportunity to the

corporation and ma)es disclosure concernin" the con7ict of interest and thecorporate opportunity;

The corporate opportunity is re0ected by the corporation; and <ither:

• The re0ection of the opportunity is fair to the corporation;• The opportunity is re0ected in advance, followin" such disclosure, by

disinterested directors, or, in the case of a senior executive who is not adirector, by a disinterested superior, in a manner that satis#es thestandards of the business 0ud"ment rule; or

• The re0ection is authori&ed in advance or rati#ed, followin" such disclosure,by disinterested shareholders, and the re0ection is not e6uivalent to a wasteof corporate assets.

.nder the ALI Principles> 4hat happens i2 the corporate !duciary ne=era=e the corporation the riht o2 !rst re2usal to ta?e the corporateopportunity; 5ee 0 &8+&(a)($) (e) ALI Principles8o #L" A 5.65(a!(B!: Ieneral -ule

director or senior executive may not ta)e advanta"e of a corporateopportunity unless:• The director or senior executive #rst oers the corporate opportunity to the

corporation and ma)es disclosure concernin" the con7ict of interest and thecorporate opportunity.

o #L" A 5.65(e!: pecial -ule Concerning Delayed $ering o) Corporate

pportunities

Oelief based solely on failure to #rst oer an opportunity to the corporationunder D3D$a%$2% is not available if:• =uch failure resulted from a "ood faith belief that the business activity did

not constitute a corporate opportunity, and• Eot later than a reasonable time after suit is #led challen"in" the ta)in" of

the corporate opportunity, the corporate opportunity is to the extentpossible oered to the corporation and re0ected in a manner that satis#esthe standards of =ubsection $a%.



.nder the ALI Principles> 4ho bears the burden o2 proo2; 9hat must that party sho4;o #L" A5.65(c!: 'urden o) roo)

party who challen"es the ta)in" of a corporate opportunity has the burden of proof, except that if such party establishes that the re6uirements of =ubsection$a%$F%$9% or $!% are not met, the director or the senior executive has the burdenof provin" that the re0ection and the ta)in" of the opportunity were fair to thecorporation.

%ompetition 5ith The %orporation

Bcers and employees:o ust refrain from competin" under "eneral a"ency laws, but duty ends on

termination of a"ency. Oestatement $Fd% "ency H.3I. !ovenant not to compete $reasonable as to duration and "eo"raphic scope%. >cers are a"ents of the corporation, and in a"ency relations, a"ents have a

duty to not compete with the principal durin" the relationship.• That duty to refrain from competin" ends when the a"ency relationship

terminates.

• covenant not to compete is very common because the duty of loyaltyends at termination 1 if the covenant is violated after the termination of therelationship, there is a remedy for breach of contract

-irectors (ALI Principles):o Sery similar to corporate opportunity. !ompetition may be saniti&ed by

disinterested director or shareholder approval with full disclosure. =ee D.3G L(5rinciples. ?irectors often serve on the board of various corporations that compete with

each other. ou need disclosure and the relationship needs to be saniti&ed

7eriatie #uits:

• 9hat is a deri,ati,e suit1

o ne brou"ht by a shareholder $plainti% on behalf of the corporation, to remedyharm that the corporation has suered. !9 P.I3$2%: a civil suit in the ri"ht of a domestic corporation.

• @orces the action that 9? doesn't want to ta)e.

• =hares are indirectly aected

• Ke care because there are procedural hurdles.

• 9hy is a deri,ati,e suit necessary1 <"/T: 9ho ma0es the decision whether acorporation sues its directors )or breach o) duty o) care or duty o) loyalty1o (t's the way we )eep directors honest.

o !an be used a"ainst a corporation because the 9oard, for instance, refuses to suea third party

o ost li)ely situation is where you have con7icts of interest or any other breach of#duciary duty



o (f directors have ripped the corporation o, the corporation $throu"h itsshareholders% have a cause of action, because they stole from the corporation$shareholders are indirectly impacted%

o (t’s an action to force the corporation to "o after themselves or after a speci#cdirector

• 7eriatie #uit 'e+uirements:o 9rong to Corporation "tsel)

Thin"s can be wron" to the shareholder but not corporation. ?erivative v. ?irect =uit

#hareholder with #tandingo 7'C# A E.B Contemporaneous hareholder -ule

=hareholder has to be a shareholder at the time of act complained or from

transfer by operation of law. E? @airly and ade6uately represent the corporation.

• (f the shareholder ceases to satisfy either one of them8 then they don’t havestandin" and another shareholder can be substituted in, or

• (f they want personal "ain then it’s dismissed.

o ay bondholders be derivative plaintisQ Khat if the bonds are convertible intocommon stoc)Q ay holders of stoc) options be derivative plaintisQ 9ondholders are creditors 1 they are not derivative plaintis. (f the bonds are

converted into stoc), they only have standin" if the conversion happenedbefore the alle"ed harm. ptions are merely contracts 1 you don’t own sharesuntil you exercise the option to buy shares. Eo standin".

o !an a director who is not a shareholder but believes that that the other boardmembers have breached their duty of loyalty to the corporation become aderivative plaintiQ Eo. =omeone who does not own shares at the time of the alle"ed harm has no

standin". 9ein" a director is not enou"h to have standin".

o Khat if the shareholder8plainti sells all of her shares durin" the lawsuitQ shareholder may not commence or maintain a derivative proceedin" unless

they are a contemporaneous owner who fairly and ade6uately represents theinterests of the corporation. =o no standin" if the shares are sold.

• 7emand

o 7'C#:

Thou shalt ma)e a demand )L5)#

(n writin" To the board

• 9oard has up to R3 days to respond. pply 9MO.



• <!<5T the R3 days can be waived/lessened if there is "oin" to beirreparable in0ury.

B%)C )L5)# )L5)# )L5)# must ma>e the demand

o Delaware:

(f ma)in" a demand would be futile then demand is excused.

• @utile if the plainti must alle"e particulari&e facts, which create a

reasonable doubt that the directors are disinterested and independent orthe challen"ed transaction was otherwise the product of a valid exercise of9M.

• 7ismissing 7eriatie #uits:

o (f demand is made, then the corporation can ta)e the lawsuit forward, or can tryto have the lawsuit dismissed.

o The board can appoint a =L! that can ma)e the determination whether or not toproceed with the liti"ation. #pecial Litigation %ommittee Qote "or 7ismissal:

2. t least - directors votin" in favor-. a)in" up an a>rmative vote of a ma0ority of the 6uali#ed directors

o =L! can a"ree it’s a "ood claim, but if it costs too much it can still be notin the best interest of the corporation.

B%) 7I#I##)L:o derivative proceedin" shall be dismissed that is:

Kithin "ood faith and fter reasonable in6uiry

o 'urden o) roo):

(f 6uali#ed ma0ority, plainti must show either

• Lac) of "ood faith,

• Eo reasonable in6uiry,

• =L! was "rossly ne"li"ent

(f ma0ority of directors are dis6uali#ed, !orp must show

• ood @aith

• Oeasonable (n6uiry

• 7*L)5)'* 7I#I##)L:

o ?emand Oe6uired !ases8 court defers to 9MOo ?emand <xcused cases8 courts "ive a second loo) to =L! decisions:

tep B: the corporation will have to show facts that the special liti"ationcommittee was:• Oeally independent,

• (n "ood faith and



• fter thorou"h investi"ation. tep =: (f the corporation meets =tep 2 then the court will apply it’s own

independent 0ud"ment anyway.

%losely Held %orporations

/euirements:

o =mall number of stoc)holders $Less than 23%o Eo ready mar)et of stoc)o =ubstantial ma0ority stoc)holder participation in the

mana"ement/direction/operations of the corporation. =toc)holders run the day8to8day operations. Jard to sell shares <mployment opportunity/investment Ba lot li)e a partnership Limited Liability of =hareholders

#hareholder )greement:o Jas to be in writin" and si"ned before it’s enforceable.o Jave to put the world on notice of the shareholder a"reement.

Jave to conspicuously note on the shares the shareholder a"reementspresence.

(f they ta)e without notice then they would be a bona #de purchaser for valuenot bound by the provisions of the shareholder a"reement.

o "reement ceases when they become publicly traded.o (t’s valid for 23 years unless the a"reement provides otherwise.o Board: !an eliminate the board alto"ether.

nother way is to "uarantee a shareholder is elected as director.

'esoling These #pecial $roblems

• Jow do we protect the ri"hts of minority shareholders of close corporationQo ssurin" their representation on the board directors throu"h votin" control

devices.o Oestrictions of stoc) transferso 5rovidin" a mar)et for their shares in the event of death, disability, and

termination of employment



o 5rotectin" minority shareholders from oppressive conduct of ma0orityshareholders.

o Oesolution of deadloc)

'estrictions on Trans"er o" #toc>

Can shareholders o2 a close corporation pre=ent “outsides” 2rom acuirinshares; I2 so> ho4 do they do so and 4hat are the reuirements; 5ee<DCA 0 '8"8o =hareholders will worry about what will happen in case one of the shareholders

"ets divorced, and their shares "et transferred to the ex8spouse. ou may not want that person to have ri"hts as a shareholder. They may also worry about the children of their co8owners "ettin" shareholder

interest

o Three ways we can protect a"ainst outsiders $must be in writin"%: 9ylaws =hareholder "reement rticles of (ncorporation

9hat type o2 areement do shareholders typically enter to restrict trans2er o2 shares and to pro=ide a mar?et 2or shares upon 4ithdra4al;o (n one of those three places, we can have a restriction on transfer of stoc) $ri"ht

of #rst refusal must #rst be "iven to the remainin" shareholders%.o Typically done in bylaws or a separate a"reement, because articles of

incorporation are public record, and owners of small corporations probably don’twant their internal aairs to be made public.

9hat has to be placed on stoc? certi!cate i2 theres a restriction;o !onspicuous notice called a restricti,e ledger $these shares are sub0ect to a

shareholder a"reement on date%.

o 'uy>ell #greement: (f someone dies, "ets divorced, becomes disabled, theremust be a mechanism as to what will happen to the remainin" shares. (n the case of death, can be funded by life insurance. (n the case of disability,

can be funded by disability insurance.

#terilizing The Board

As a eneral rule> 4ho has the exclusi=e authority to manae the businessand aairs o2 the corporation; 5ee <DCA 0 8+$8o 7'C# A .6B(b!: ll corporate powers shall be exercised by or under the authority

of, and the business and aairs of the corporation mana"ed by or under thedirection of, its board of director.+



I2 shareholders can aree amon themsel=es ho4 they 4ill =ote theirshares> can they also aree on ho4 the corporation 4ill be manaed;o ld cases say shareholders can’t a"ree to ma)e board of directors to act in a

certain way

<DCA 0 8,": 5hareholder Areementso Khat is the purpose of a shareholder a"reement under 9! P.F-Q ay the

shareholders restrict the discretion of the board of directors to mana"e thebusinessQ ay the shareholders completely eliminate the board all to"etherQ The purpose of the shareholder a"reement is to restrict/eliminate board of

directors’ discretion, it may dictate that is to be employed and restrictions onthe transfer of stoc).

9! P.F- allows for these restrictions, but only if EE(=L a"reed toby the shareholders.

o Can the shareholders o2 a public corporation enter into a shareholder

areement; 5ee <DCA 0 8,"(d)8 =hareholders of a public corporation enter into a shareholder a"reement,

because 9! forbids it and, practically spea)in", you can’t "et 2333shareholders to unanimously a"ree

#hareholder !iduciary 7uties• <inority 5hareholder Protection:

o The %ual pportunity Test: (f you "ive an opportunity of the ma0ority to sell theirshares you have to "ive the same percenta"e $ratable percent% to the minority tolet them sell their shares. therwise the ma0ority to li6uidate their shares whilethe minority is left li6uid. $?onahue%

• <assachusetts Approach: 1iduciary -uties Amon 5hareholders

o Free8e ut: minority shareholder is left with no opportunity to sell shares, isremoved from the board, is #red from their position or receives no bene#ts. ood @aith tmost respect to other shareholders

o artnership standard: einhard *tmost "ood faith and loyalty+ o trict Iood Faith: pplies from minority shareholders to the ma0ority shareholders

as well.

• 5teps:o #tep 1: Le"itimate business purpose.



nce the plainti shows prima facie case of a free&e out the burden is on thema0ority $corporation% to show a le"itimate business purpose.

(f there is no le"itimate purpose the plainti $minority% prevails.

o #tep 2: (f they show a le"itimate purpose Then the burden shifts to the minority shareholder to show that the le"itimate

business purpose for the decision could have been achieved throu"h an lessintrusive way.

I! O *=) H* T)LX# )BOAT )##)%HA#*TT#, H* I# )#XI0 )BOAT TH*5ILX*# )7 7O)HA* %)#*

Fudicial ?Inoluntary@ 7issolution

Bn 4hat rounds may a shareholder petition a court to order dissolution o2 a corporation; 5ee <DCA 0 $%8,+(");o Deadloc0

(ncludes situations where the directors are deadloc)ed or shareholders aredeadloc) and it leads to irreparable in0ury.

!an’t en"a"e in deadloc) on purpose/in bad faith.

o "llegal+ )raudulent+ or oppressi,e conduct

(f the corporation is ille"al and they want out but don’t want to sell for pennieson the dollar then they can ma)e the 0udicial petition.

ppression: nce a prima facie case of frustration of reasonable expectationsis established, the control "roup must show an *ade6uate, alternative remedy+$buy out% to forestall dissolution in an oppression case

o Corporate assets being misapplied or wasted

o BA OAT Option: (f the court orders dissolution of a close corporation, thecorporation may elect or, if it fails to elect, one or more shareholders may elect topurchase all of the petitioners shares.

• Can deadloc0 be a,oided by proper ad,ance planning1

o es by puttin" it in your buy8sell a"reement

B%) Oppression

• Bppression: @rustration of the reasonable expectations of the shareholder at thetime they became a shareholder $Uemp and 9eatley%

• /easonable Expectations 6est:

o <igh %xpectation: LivelihoodQ 5ayroll rest of my lifeQo Low %xpectation: =ilent partner not carin" about operations maybe buy sell

a"reement is all the protection they need.

-issolution: -rastic /emedy: Terminates the le"al entity of the corporation.o 5roceedin"s by the state8 not meetin" their corporate obli"ations the state can

shut you down.



o 5roceedin" by a shareholder8 director deadloc) in the mana"ement of thecorporation aairs and there is in0ury threatened or bein" suered.

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